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On Dynamic Tax Reform with Regime Switching

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  • Wen-ya Chang

    (Fu-Jen Catholic University, Taiwan)

  • Hsueh-fang Tsai

    (Fu-Jen Catholic University, Taiwan)

Abstract

This article investigates the effect of tax reform from the viewpoint of regime switching and finds that, following a tax-reform announcement with constant government spending, the key factor determining the adjustment patterns of consumption and capital is the relative extent of the tax-reform-induced “substitution effect†versus the tax-reform-induced “savings-investment effect.†Furthermore, if a rise in government spending is associated with an announcement of tax-financing change, then a crowding-in, a partial crowding-out, or an over-crowding-out effect may be exhibited prior to a government financing change. At the instant of regime switching, consumption exhibits a discontinuous fall to ensure the optimality condition.

Suggested Citation

  • Wen-ya Chang & Hsueh-fang Tsai, 2006. "On Dynamic Tax Reform with Regime Switching," Public Finance Review, , vol. 34(3), pages 306-327, May.
    • Handle: RePEc:sae:pubfin:v:34:y:2006:i:3:p:306-327
    DOI: 10.1177/1091142105284914
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