Time-consistent consumption taxation

Laczo, Sarolta and Rossi, Raffaele (2014) Time-consistent consumption taxation. Working Paper. Lancaster University, Department of Economics, Lancaster.

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Abstract

We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.

Item Type:
Monograph (Working Paper)
Subjects:
ID Code:
71348
Deposited By:
Deposited On:
21 Oct 2014 12:04
Refereed?:
No
Published?:
Published
Last Modified:
24 Nov 2020 10:05