Current Analysis on
Economics & Finance

Research Article  |  Published 20 September 2019

Taxation of Various Fiscal Bases and Short Run Economic Activity in Open Economy

Séverine Menguy*

Université Paris Descartes, Sorbonne Paris Cité, 12 rue de l’école de Médecine, 75270 Paris, Cedex 06, France.

Abstract

This paper aims at contributing to the debate about the appropriate fiscal policy in open economy, in order to promote short run economic activity, and to avoid an outbidding of the public indebtedness level. To foster short run economic activity, a temporary decrease of the consumption taxation rate would be an efficient policy instrument; global economic activity and all factors of global demand would then be higher, and the situation on the labor market would also be improved. A temporary decrease of the labor taxation rate would also sustain short run economic activity, private investment and net exports, and improve employment, despite the sluggishness of private and public consumption. Our modeling shows that a temporary decrease of the capital taxation rate would also be beneficial to current global economic activity and private investment. However, at least in the short run, reducing the capital taxation rate would less improve economic activity and would less reduce the public debt to GDP ratio than decreasing labor or consumption taxes.

Keywords:
Capital taxation rate, labor taxation rate, consumption taxation rate, short run economic activity, labor market, public debt.

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