The Effects of Tax Policies on Dynamics of Growth, Capital Stock and Consumption Based on an Optimal Growth Model: Evidence from IRAN and a Group of East Asian Countries

Using Ramsey – Cass – Koopmans optimal growth model and specifying government’ tax behavior, this study analyzes the effect of tax policies on steady-state and optimal dynamic path of consumption, capital stock and output for Iran and a group of East Asian countries. In this regard, after specifying consumption and capital stock dynamic behaviors, a model is calibrated and simulated for the selected economies by using annul data during 1980 -2010. Based on the simulation results for Iran, and compared to East Asian region, reductions in tax rates have no significant effects on steady- state and optimal dynamic path of capital stock, consumption and per capita output. Hence, tax policies are not effective in stimulating the real sector of the Iranian economy. The results also show that reductions in rates of income tax, capital gain tax and profit tax have positive and significant effects on the long-run steady-state path of consumption, capital stock and output, especially in less developed East Asian countries. The simulation results show that reduction in consumption tax rate, in particular across the highly developed East Asian countries, has positive and significant effect on steady-state of consumption; however, it has no effect on capital stock and output.