Indirect taxation and the welfare effects of altruism on the optimal fiscal policy
AbstractThis paper analyzes the welfare effects of altruism on the optimal fiscal policy. The existence of positive bequests links present and future generations in the economy. We show that these altruistic links provide a new role for indirect taxation (consumption and estate taxes) with important welfare implications. We use three different altruistic approaches (warm-glow, dynastic, and family) to illustrate how the presence of bequests in the budget constraint of the donee gives the government the ability to use indirect taxation to mimic lump-sum taxation and to implement the first-best outcome in the long-run. This channel is not present in economies without altruism, such as the infinite-lived consumer economy or the overlapping generations economy, where long-run welfare is suboptimal and indirect taxation is irrelevant.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-047.
Date of creation: 2009
Date of revision:
Other versions of this item:
- Garriga, Carlos & Sánchez-Losada, Fernando, 2009. "Indirect taxation and the welfare effects of altruism on the optimal fiscal policy," Economic Modelling, Elsevier, vol. 26(6), pages 1365-1374, November.
- NEP-ALL-2009-10-31 (All new papers)
- NEP-DGE-2009-10-31 (Dynamic General Equilibrium)
- NEP-PBE-2009-10-31 (Public Economics)
- NEP-PUB-2009-10-31 (Public Finance)
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