Tax Cuts and Growth: Israel in the 2000s Zvi Hercowitz and Avihai Lifschitz Presentation at the Forum Sapir Conference December 2013 Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 1 / 23
Introduction Per-Capita GDP Growth Israel OECD Annual Avg. 2001-2011 1 . 83 1 . 00 Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 2 / 23
Introduction Per-Capita GDP Growth Israel OECD Annual Avg. 2001-2011 1 . 83 1 . 00 Tax Changes Labor Avg Stat Marg Rate Corp Rate 2002 33 36 2011 19 24 2012 19 25 Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 2 / 23
Introduction Per-Capita GDP Growth Israel OECD Annual Avg. 2001-2011 1 . 83 1 . 00 Tax Changes Labor Avg Stat Marg Rate Corp Rate 2002 33 36 2011 19 24 2012 19 25 % change % change net wage net profits 2011 21% 19% 2012 — -1.3% Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 2 / 23
Introduction: Marginal Labor Income Tax Rates < 1/2 avg wage 1/2 -- avg wage 60 avg -- 2 avg wage 2 -- 4 avg wage > 4 avg wage 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 12 Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 3 / 23
The Tax Process in Israel in the 2000s 2002/2003: Basic plan: declining income/corporate tax rates till 2007 2005: 1st modification: extension till 2010 2009: 2nd modification: extension of corporate tax decline till 2016 2011: Exit — with reversal of corporate tax change We view this as the realization of a stochastic process Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 4 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Impose this process on a calibrated model of the Israeli economy & simulate the 2001-2012 period Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Impose this process on a calibrated model of the Israeli economy & simulate the 2001-2012 period Leave out all possible other exogenous changes – control for them Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Impose this process on a calibrated model of the Israeli economy & simulate the 2001-2012 period Leave out all possible other exogenous changes – control for them Compare the actual growth during the 2001-2012 period to that generated by the model Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Impose this process on a calibrated model of the Israeli economy & simulate the 2001-2012 period Leave out all possible other exogenous changes – control for them Compare the actual growth during the 2001-2012 period to that generated by the model Drawback of the methodology: model specific Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Purpose of the Project and Methodology Purpose of the project: To evaluate the contribution of the tax process to growth in Israel from 2001 to 2012 Methodology: Parameterize & calibrate the tax rate process from 2002/3 onwards – initial announcements, probabilities and characteristics of modifying and abandoning the plan Impose this process on a calibrated model of the Israeli economy & simulate the 2001-2012 period Leave out all possible other exogenous changes – control for them Compare the actual growth during the 2001-2012 period to that generated by the model Drawback of the methodology: model specific Advantage of the methodology: other factors perfectly controlled for Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 5 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Tax process — labor income and corporations Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Tax process — labor income and corporations Public debt target and value added tax Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Tax process — labor income and corporations Public debt target and value added tax Accommodates: Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Tax process — labor income and corporations Public debt target and value added tax Accommodates: government spending Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Overview of the Model Adapted from Friedman, Hercowitz and Sidi (2012) Open economy which imports intermediate products, exports it’s output. Short-run financial flows friction Fiscal policy: Exogenous : Tax process — labor income and corporations Public debt target and value added tax Accommodates: government spending Equilibrium Relative Prices (in terms of output): imports, labor. Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 6 / 23
Model: Technology Production Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 7 / 23
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