Essays on Fiscal Policy and Immigration

This dissertation studies how fiscal policy influences the macroeconomic variables in the long run under different economic environments and restrictions. Chapter 1 introduces a politico-economic model with a welfare state and immigration. In this model, policies on taxes and immigration are decided by the plurality voting system. While many studies on fiscal implications of immigration argue that relaxing immigration policies can substitute tax reforms in aging economies, I show that the democratic voting procedure can dampen the effect of relaxing immigration policies since desired policy reforms are not always implemented by the winning candidate of an election. This political economy results in social welfare losses through three different channels. Chapter 2 examines differences in hours worked between South Korea and Mexico during 1991-2008. Specifically, this paper assesses the extent to which this difference is explained by a neoclassical growth model with distortionary taxation of government. The model successfully captures the long-run trends of hours worked in Korea and Mexico. While gradual decline in hours worked of Korea is well explained by increasing tax wedges of the labor market, hours worked in Mexico exhibit a relatively at trend since Mexico's labor wedges do not change dramatically during the sample period. This shows that long-term fiscal policy was significant in Korea economy around the 1997 crisis, while government fiscal policy played only a modest role in Mexico's labor market during the Peso crisis. Finally, Chapter 3 examines the large differences in long-run changes in macroeconomic variables across 15 OECD countries. Specifically, this paper assesses the extent to which the neoclassical growth model equipped with government consumption, investment, and proportional taxes on expenditures and factor incomes explains the macroeconomic variables. According to the results, proportional taxes on income and expenditure plays a principal role in explanation of long-term trends in those variables. Changes in government investment influence the variables only modestly. This implies that it is not sizes of government expenditure, but distortions caused by tax wedges, that influence changes of macroeconomic variables in the long run.