Keywords: Income tax, welfare, stabilization, cooperation
Abstract: This paper studies an international tax policy design problem by
employing a two-country dynamic general equilibrium model with incomplete
asset markets. We investigate the possibility of welfareimproving
active tax policies, in particular capital and labor income
tax, under the non-cooperative Nash equilibrium and the cooperative
equilibrium. Unlike the conventional wisdom regarding stabilization
policies, optimal tax policies in our economy are procyclical. Relative
to the non-cooperative setting, international tax policy cooperation requires
more active tax policies (about two times) and generates large
extra welfare gains (by about a third).
Full paper (400 KB PDF)
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Last update: November 17, 2003