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Prepared by Pelin Berkmen. This chapter will be published as a forthcoming working paper.
The tax reform package included an increase of the value added tax (VAT) rate from 16 to 19 percent, a reduction in payroll tax relief equivalent to 0.4 percent of GDP, and a reduction in the corporate income tax rate from 40 to 31 percent combined with some base broadening. Plans were announced in November 2005, and the increase of the VAT rate and the reduction in corporate income tax rate were implemented in 2007 and 2008 respectively. The structural fiscal deficit declined by 1 percentage point in 2007 helped by expenditure reductions, which were carried out in parallel.
The five regions are the United States, the Euro Area, Japan, emerging Asia and other countries. The details of the model are presented at Kumhof and others (2010) and will not be repeated here. The appendix provides a brief summary of the model.
The growth rate would be lower by 0.3–0.5 percentage points on average.
There is a wide range of estimates of precautionary savings in Japan (ranging from 0 to 15 percent). Most studies are done with micro-level data for gross savings. As the net savings based on national income data are already relatively low, the precautionary effects are assumed to be limited to 0.5–1 percentage points.
Including public debt owed by the Fiscal Investment and Loan Program.
Given that most tail risk scenarios feature 100–200 basis points increase in risk premium, this is quite a mild assumption.
This estimate is rather on the low side. There is a wide range of sector specific mark-ups. For example, OECD (2008) estimates that mark-ups in non-manufacturing sectors are three times higher than the mark-ups in manufacturing. Kiyota, et. al. (2008) finds that even in the low mark-up sectors, firms enjoy mark-ups above unity and entry of a firm has a negative impact on mark-ups.
Consumption of the liquidity constrained agents would be lower owing to decline in transfers.
This scenario is consistent with the rebalancing scenario analyzed in Chapter 3 of the Asia and Pacific Department’s Regional Economic Outlook, April 2010.
Higher national savings in the U.S., in the absence of any other changes in the rest of the world, would imply a higher current account and real effective depreciation in the U.S.