Budget Deficits Under Alternative Tax Systems

Traditional analyses of budget deficits arising from tax cuts have focused on the size of the deficit and disregarded the underlying tax system. This paper examines the international effects of budget deficits under alternative tax systems. The key finding is that the consequences of tax policies and the characteristics of the international transmission mechanism depend critically on the composition of taxes. Under a value-added tax system, a budget deficit worsens the trade balance and raises the world