Abstract
How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a country-specific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 95-130 |
| Number of pages | 36 |
| Journal | Journal of Political Economy |
| Volume | 131 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2023 |
Bibliographical note
Funding Information:We thank Fernando Alvarez, Roc Armenter, Charles Brendon, Juan Carlos Conesa, Isabel Correia, Robert E. Lucas Jr., Albert Marcet, Chris Phelan, Dejanir Silva, Nancy Stokey, Harald Uhlig, and Marcelo Veracierto for very helpful discussions. We especially thank Andrew Atkeson and three referees for detailed comments. Chari thanks the National Science Foundation for supporting the research in this paper, and Teles acknowledges the support of Fundação para a Ciência e a Tecnologia as well as the A Dynamic Economic and Monetary Union (ADEMU) project funded by the European Union’s Horizon 2020 program under grant agreement 649396. The views expressed herein are those of the authors
Funding Information:
We thank Fernando Alvarez, Roc Armenter, Charles Brendon, Juan Carlos Conesa, Isabel Correia, Robert E. Lucas Jr., Albert Marcet, Chris Phelan, Dejanir Silva, Nancy Stokey, Harald Uhlig, and Marcelo Veracierto for very helpful discussions. We especially thank Andrew Atkeson and three referees for detailed comments. Chari thanks the National Science Foundation for supporting the research in this paper, and Teles acknowledges the support of Fundação para a Ciência e a Tecnologia as well as the A Dynamic Economic and Monetary Union (ADEMU) project funded by the European Union’s Horizon 2020 program under grant agreement 649396. The views expressed herein are those of the authors.
Publisher Copyright:
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