Optimal Fiscal Policy with Consumption Taxation

Motta, Giorgio Enrico and Rossi, Raffaele (2019) Optimal Fiscal Policy with Consumption Taxation. Journal of Money, Credit and Banking, 51 (1). pp. 139-161. ISSN 0022-2879

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Abstract

We characterise optimal fiscal policies in a General Equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labour income taxes. Consumption taxation acts as indirect taxation of prots (intratemporal gains of taxing consumption) and enables the policy-maker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labour income taxation. Then, we quantify numerically each of these gains by calibrating the model on the US economy.