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Aggregate instability under balanced-budget consumption taxes: A re-examination

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  • Nourry, Carine
  • Seegmuller, Thomas
  • Venditti, Alain

Abstract

We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, we consider a specification of preferences derived from Jaimovich (2008) [14] and Jaimovich and Rebelo (2009) [15] which is flexible enough to encompass varying degrees of income effect. When the income effect is not too large, we show that there exists a Laffer curve, which explains the multiplicity of steady states, and that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter-cyclical with respect to consumption. Numerical illustrations also show that consumption taxation may be a source of instability for most OECD countries for a wide range of structural parametersʼ configurations. We finally prove the robustness of our conclusions if we consider a discrete-time setup.

Suggested Citation

  • Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
  • Handle: RePEc:eee:jetheo:v:148:y:2013:i:5:p:1977-2006
    DOI: 10.1016/j.jet.2013.07.010
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    Cited by:

    1. Mauro Bambi & Siritas Kettanurak, 2017. "Procyclical endogenous taxation and aggregate instability," Discussion Papers 17/15, Department of Economics, University of York.
    2. repec:eee:jmacro:v:56:y:2018:i:c:p:231-242 is not listed on IDEAS
    3. Juin-Jen Chang & Jang-Ting Guo & Jhy-Yuan Shieh & Wei-Neng Wang, 2015. "Sectoral Composition Of Government Spending And Macroeconomic (In)Stability," Economic Inquiry, Western Economic Association International, vol. 53(1), pages 23-33, January.
    4. repec:bla:jpbect:v:19:y:2017:i:5:p:937-956 is not listed on IDEAS
    5. Mauro Bambi & Alain Venditti, 2016. "Time-varying Consumption Tax, Productive Government Spending, and Aggregate Instability," Discussion Papers 16/01, Department of Economics, University of York.
    6. Nishimura, Kazuo & Seegmuller, Thomas & Venditti, Alain, 2015. "Fiscal policy, debt constraint and expectations-driven volatility," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 305-316.
    7. Atsumasa Kondo, 2016. "Sustainability of Public Debt in an AK Model with Complex Tax System," Discussion Papers CRR Discussion Paper Series A: General 21, Shiga University, Faculty of Economics,Center for Risk Research.
    8. Boucekkine, Raouf & Nishimura, Kazuo & Venditti, Alain, 2015. "Introduction to financial frictions and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 271-275.
    9. Nicolas Abad & Alain Venditti, 2018. "A Note on Balanced-Budget Income Taxes and Aggregate (In)Stability in Multi-Sector Economies," AMSE Working Papers 1828, Aix-Marseille School of Economics, France.
    10. Kazuo Nishimura & Carine Nourry & Thomas Seegmuller & Alain Venditti, 2013. "Destabilizing balanced-budget consumption taxes in multi-sector economies," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 113-130, March.
    11. Juin‐Jen Chang & Jang‐Ting Guo & Jhy‐Yuan Shieh & Wei‐Neng Wang, 2019. "Sectoral composition of government spending, distortionary income taxation, and macroeconomic (in)stability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(1), pages 95-107, March.
    12. Huang, Kevin X.D. & Meng, Qinglai & Xue, Jianpo, 2017. "Balanced-budget income taxes and aggregate stability in a small open economy," Journal of International Economics, Elsevier, vol. 105(C), pages 90-101.
    13. Stefano Bosi & David Desmarchelier, 2017. "Are the Laffer curve and the green paradox mutually exclusive?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(5), pages 937-956, October.
    14. Yoichi Gokan, 2017. "Do Consumption Externalities Correspond to the Indivisible Tax Rates on Consumpiton?," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    15. Meng, Qinglai & Xue, Jianpo, 2015. "Balanced-budget consumption taxes and aggregate stability in a small open economy," Economics Letters, Elsevier, vol. 137(C), pages 214-217.
    16. Yoichi Gokan, 2017. "Do Consumption Externalities Correspond to the Indivisible Tax Rates on Consumpiton?," CIRJE F-Series CIRJE-F-1040, CIRJE, Faculty of Economics, University of Tokyo.
    17. Greiner Alfred & Anton Bondarev, 2015. "Public debt and aggregate stability with endogenous growth and a state-dependent consumption tax," Economics Bulletin, AccessEcon, vol. 35(4), pages 2601-2609.
    18. repec:wly:jmoncb:v:50:y:2018:i:8:p:1669-1709 is not listed on IDEAS
    19. Chen, Shu-Hua & Guo, Jang-Ting, 2014. "Progressive taxation and macroeconomic (in)stability with utility-generating government spending," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 174-183.
    20. Jianpo Xue & Chong K. Yip, 2013. "Balanced-Budget Rules and Aggregate Instability: The Role of Consumption Taxes in a Monetary Economy," Working Papers 112013, Hong Kong Institute for Monetary Research.
    21. Atsumasa Kondo, 2016. "Interconnection of Fiscal Policies on Sustainability of Public Debt," Discussion Papers CRR Discussion Paper Series A: General 20, Shiga University, Faculty of Economics,Center for Risk Research.
    22. Kevin X.D. Huang & Qinglai Meng & Jianpo Xue, 2018. "Balanced‐Budget Rules and Aggregate Instability: The Role of Endogenous Capital Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1669-1709, December.

    More about this item

    Keywords

    Indeterminacy; Endogenous business cycles; Consumption taxes; Income effect; Balanced-budget rule; Infinite-horizon model;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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