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Time-consistent consumption taxation

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  • Laczó, Sarolta
  • Rossi, Raffaele

Abstract

We characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies. We consider a neoclassical economy where factor income taxation is distortionary within the period, due to endogenous labour and capital utilisation and non-tax-deductibility of depreciation. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies with consumption taxation are remarkably similar to their Ramsey counterparts. 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.

Suggested Citation

  • Laczó, Sarolta & Rossi, Raffaele, 2020. "Time-consistent consumption taxation," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 194-220.
  • Handle: RePEc:eee:moneco:v:114:y:2020:i:c:p:194-220
    DOI: 10.1016/j.jmoneco.2019.03.005
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Time-Consistent Consumption Taxation
      by Christian Zimmermann in NEP-DGE blog on 2018-05-13 03:44:28

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    3. Aleksandar Vasilev, 2020. "Optimal Fiscal Policy with Epstein–Zin Preferences and Utility-Enhancing Government Services: Lessons from Bulgaria (1999–2016)," Problems of Economic Transition, Taylor & Francis Journals, vol. 62(1-2), pages 133-146, February.
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    More about this item

    Keywords

    Fiscal policy; Markov-perfect policies; Consumption taxation; Variable capital utilisation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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