Tax Cuts and Growth: Israel in the 2000s Zvi Hercowitz and Avihai - - PowerPoint PPT Presentation

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 Marg Rate Stat 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 Marg Rate Stat Corp Rate 2002 33 36 2011 19 24 2012 19 25 % change net wage % change 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

10 20 30 40 50 60 02 03 04 05 06 07 08 09 10 11 12 < 1/2 avg wage 1/2 -- avg wage avg -- 2 avg wage 2 -- 4 avg wage > 4 avg wage

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

• utput. 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

• utput. 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

• utput. 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

• utput. 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

• utput. 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

• utput. 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

• utput. 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

• utput. 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

Model: Technology

Production

Output: Qt = Y γ

t M1−γ t

, 0 < γ < 1 Yt domestic value added, Mt imports of intermediate products

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 7 / 23

Model: Technology

Production

Output: Qt = Y γ

t M1−γ t

, 0 < γ < 1 Yt domestic value added, Mt imports of intermediate products Value added or GDP: Yt = K α

t L1−α t

, 0 < α < 1 Kt capital Lt labor input, constant technology

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 7 / 23

Model: Technology

Production

Output: Qt = Y γ

t M1−γ t

, 0 < γ < 1 Yt domestic value added, Mt imports of intermediate products Value added or GDP: Yt = K α

t L1−α t

, 0 < α < 1 Kt capital Lt labor input, constant technology

Evolution of the capital stock: Kt+1 = Kt(1 − δ) + It, 0 < δ < 1 It gross investment

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 7 / 23

Model: Technology

Production

Output: Qt = Y γ

t M1−γ t

, 0 < γ < 1 Yt domestic value added, Mt imports of intermediate products Value added or GDP: Yt = K α

t L1−α t

, 0 < α < 1 Kt capital Lt labor input, constant technology

Evolution of the capital stock: Kt+1 = Kt(1 − δ) + It, 0 < δ < 1 It gross investment Adjustment costs: Jk

t = ωk

2 (Kt+1 − Kt)2 , ωk > 0

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 7 / 23

Model: Firm’s optimization

1 1 + rt Et

• 1 − τk

t+1

• αγK αγ−1

t+1 L(1−α)γ t+1

M1−γ

t+1 + 1 − δ

• = 1,

ωk = 0 τk

t+1 corporate tax rate, rt effective interest rate

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 8 / 23

Model: Firm’s optimization

1 1 + rt Et

• 1 − τk

t+1

• αγK αγ−1

t+1 L(1−α)γ t+1

M1−γ

t+1 + 1 − δ

• = 1,

ωk = 0 τk

t+1 corporate tax rate, rt effective interest rate

Lt = ϑlKt (Wt)− 1

α (Pm

t )− (1−γ)

αγ

Mt = ϑmKt (Wt)− 1−α

α (Pm

t )− 1−γ(1−α)

αγ

Prices in terms of output: Wt labor, Pm

t

imports — no tax effects

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 8 / 23

Model: Household’s Optimization

Preferences proposed by Jaimovich-Rebelo (2009): E0

∞

∑

t=0

βt ln

• Ct − ψLϕ

t Zt

• ,

0 < β < 1, ϕ > 1, ψ > 0, Zt = C ξ

t Z 1−ξ t−1 ,

0 ≤ ξ ≤ 1 Ct consumption, Lt labor supply

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 9 / 23

Model: Household’s Optimization

Preferences proposed by Jaimovich-Rebelo (2009): E0

∞

∑

t=0

βt ln

• Ct − ψLϕ

t Zt

• ,

0 < β < 1, ϕ > 1, ψ > 0, Zt = C ξ

t Z 1−ξ t−1 ,

0 ≤ ξ ≤ 1 Ct consumption, Lt labor supply If ξ = 0 Lt = 1 ψϕ (1 − τl

t)

(1 + τc)Wt

• 1

ϕ−1

τl

t labor income tax rate, τc consumption tax — constant

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 9 / 23

Model: Links with the Rest of the World

World interest rate ¯ r = 1 − β β

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 10 / 23

Model: Links with the Rest of the World

World interest rate ¯ r = 1 − β β Foreign lending/borrowing friction from Schmitt-Grohe and Uribe (2003) Jf

t = ωf

2 (Ft+1 − F ∗)2 , ωf > 0 Ft+1foreign assets, F ∗ exogenous target

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 10 / 23

Model: Links with the Rest of the World

World interest rate ¯ r = 1 − β β Foreign lending/borrowing friction from Schmitt-Grohe and Uribe (2003) Jf

t = ωf

2 (Ft+1 − F ∗)2 , ωf > 0 Ft+1foreign assets, F ∗ exogenous target Effective domestic interest rate: 1 + rt ≡ (1 + ¯ r) 1 + ωf (Ft+1 − F ∗)

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 10 / 23

Model: Links with the Rest of the World

World interest rate ¯ r = 1 − β β Foreign lending/borrowing friction from Schmitt-Grohe and Uribe (2003) Jf

t = ωf

2 (Ft+1 − F ∗)2 , ωf > 0 Ft+1foreign assets, F ∗ exogenous target Effective domestic interest rate: 1 + rt ≡ (1 + ¯ r) 1 + ωf (Ft+1 − F ∗) Foreign demand for the domestic good: Xt = X 0 (Px

t )χ ,

χ > 0 Px

t price foreign substitute in terms of the price of the domestic good

Exogenous: Pxm

t

= Px

t /Pm t

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 10 / 23

Model: Government

Tax process

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 11 / 23

Model: Government

Tax process

Basic plan (modelling the 2002/2003 announcements):

• τ0

t

∞

t=2 ,

τ =

• τl, τk

Announcement at t = 1

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 11 / 23

Model: Government

Tax process

Basic plan (modelling the 2002/2003 announcements):

• τ0

t

∞

t=2 ,

τ =

• τl, τk

Announcement at t = 1 1st modification (modelling the 2005 decision), for s > 1:

• ∆I

t

∞

t=s+1 ,

∆ =

• ∆l, ∆k

Prob conditioned on no exit: p1

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 11 / 23

Model: Government

Tax process

Basic plan (modelling the 2002/2003 announcements):

• τ0

t

∞

t=2 ,

τ =

• τl, τk

Announcement at t = 1 1st modification (modelling the 2005 decision), for s > 1:

• ∆I

t

∞

t=s+1 ,

∆ =

• ∆l, ∆k

Prob conditioned on no exit: p1 2nd modification (modelling the 2009 decision), for r > s:

• ∆II

t

∞

t=r+1

Prob conditioned on 1st modif & no exit: p2

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 11 / 23

Model: Government

Tax process

Basic plan (modelling the 2002/2003 announcements):

• τ0

t

∞

t=2 ,

τ =

• τl, τk

Announcement at t = 1 1st modification (modelling the 2005 decision), for s > 1:

• ∆I

t

∞

t=s+1 ,

∆ =

• ∆l, ∆k

Prob conditioned on no exit: p1 2nd modification (modelling the 2009 decision), for r > s:

• ∆II

t

∞

t=r+1

Prob conditioned on 1st modif & no exit: p2 Exit (modelling the 2011 decision), for q > 2:

• τt = τi

q + ϑ

∞

t=q+1 ,

i = 0, I, II, ϑ =

• ϑl, ϑk

≥ 0 Prob pe

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 11 / 23

Model: Government

Public debt

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Model: Government

Public debt

Target B∗

t+1 = ηYt+1

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Model: Government

Public debt

Target B∗

t+1 = ηYt+1

Intermediate target ˆ B∗

t+1 = ˆ

B∗

t

• B∗

t+1/ ˆ

B∗

t

λ , 0 < λ < 1

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Model: Government

Public debt

Target B∗

t+1 = ηYt+1

Intermediate target ˆ B∗

t+1 = ˆ

B∗

t

• B∗

t+1/ ˆ

B∗

t

λ , 0 < λ < 1 Revenue Rt = τl

tWtLt + τk t (Qt − WtLt − Pm t Mt) + τc t Ct − κτl t ¯

Wt ¯ Lt

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Model: Government

Public debt

Target B∗

t+1 = ηYt+1

Intermediate target ˆ B∗

t+1 = ˆ

B∗

t

• B∗

t+1/ ˆ

B∗

t

λ , 0 < λ < 1 Revenue Rt = τl

tWtLt + τk t (Qt − WtLt − Pm t Mt) + τc t Ct − κτl t ¯

Wt ¯ Lt Purchases Gt + Tt ≤ Rt + ˆ B∗

t+1 − (1 + ¯

r)Bt Tt transfers to the public

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Model: Government

Public debt

Target B∗

t+1 = ηYt+1

Intermediate target ˆ B∗

t+1 = ˆ

B∗

t

• B∗

t+1/ ˆ

B∗

t

λ , 0 < λ < 1 Revenue Rt = τl

tWtLt + τk t (Qt − WtLt − Pm t Mt) + τc t Ct − κτl t ¯

Wt ¯ Lt Purchases Gt + Tt ≤ Rt + ˆ B∗

t+1 − (1 + ¯

r)Bt Tt transfers to the public We assume that this constraint always binds, hence Bt+1 = ˆ B∗

t+1

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 12 / 23

Equilibrium

Solution to the firm’s problem Solution to the household’s problem Equality of demand to supply of labor Qt = Ct + It + Gt + Xt + Jk

t + Jf t

Key relative price: Pm

t

Translate to the Real Exchange (ReR)

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 13 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009)

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009) Tax process:

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009) Tax process:

Effective corporate tax rates: According to actual average revenues — Parallel from Ch.9 Minhal Hachnasot Hamedina 2009-2010

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009) Tax process:

Effective corporate tax rates: According to actual average revenues — Parallel from Ch.9 Minhal Hachnasot Hamedina 2009-2010 Tax rates from actual decisions 2002/3, 2005, 2009 and 2011

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009) Tax process:

Effective corporate tax rates: According to actual average revenues — Parallel from Ch.9 Minhal Hachnasot Hamedina 2009-2010 Tax rates from actual decisions 2002/3, 2005, 2009 and 2011 pe from the Bank of Israel Companies Survey (2011), pe ≈ 0.15

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Solution Method and Parameter Values

No Markov structure ⇒ rolling certainty equivalence method Parameter values:

Basic parameters: From Friedman-Hercowitz (2010), and Jaimovich-Rebelo (2009) Tax process:

Effective corporate tax rates: According to actual average revenues — Parallel from Ch.9 Minhal Hachnasot Hamedina 2009-2010 Tax rates from actual decisions 2002/3, 2005, 2009 and 2011 pe from the Bank of Israel Companies Survey (2011), pe ≈ 0.15 p1, p2: no information, little sensitivity

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 14 / 23

Simulation

Labor income tax only Y L W ReR 2001/2012 .126 .163

• .11

.30

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 15 / 23

Simulation

Labor income tax only Y L W ReR 2001/2012 .126 .163

• .11

.30 Corporate tax only Y L W ReR 2001/2010 .05 .014 .01 .1 2010/2011

• .01
• .021
• .01

.07 2011/2012 .00 .007 .00

• .03

Total .04

• .000
• .00

.14

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 15 / 23

Comparison to the Data

Comparison to the Data Simulation: Both Taxes Y L W Rer 2001/2012 .17 .163

• .11

.48 Data Y L W Rer .214 .100

• .026

.111

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 16 / 23

Comparison to the Data

Comparison to the Data Simulation: Both Taxes Y L W Rer 2001/2012 .17 .163

• .11

.48 Data Y L W Rer .214 .100

• .026

.111 Next, look at the implications for longer term behavior of W and ReR

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 16 / 23

Longer Term Corporate Tax Rate

20 24 28 32 36 40 44 48 88 90 92 94 96 98 00 02 04 06 08 10 12

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 17 / 23

Longer Term Average Marginal Labor Tax Rate

18 20 22 24 26 28 30 32 34 88 90 92 94 96 98 00 02 04 06 08 10 12

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 18 / 23

Relative Price Behavior: Real Wage

80 85 90 95 100 105 110 88 90 92 94 96 98 00 02 04 06 08 10 12

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 19 / 23

Relative Price Behavior: Real Exchange Rate

0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 88 90 92 94 96 98 00 02 04 06 08 10 12 * Imports Price Index/GDP Price Index

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 20 / 23

Concluding Comments

Open economy implications Wealth effect of labor supply Endogenous utilization

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 21 / 23

Appendix: Dynamics of Labor Tax Reductions

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 22 / 23

Appendix: Dynamics of Corporate Tax Reductions

Zvi Hercowitz and Avihai Lifschitz () Tax Cuts and Growth: Israel in the 2000s December 2013 23 / 23