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Time-consistent fiscal policy under heterogeneity: conflicting or common interests?

Author

Listed:
  • Konstantinos Angelopoulos

    (University of Glasgow)

  • James Malley

    () (University of Glasgow)

  • Apostolis Philippopoulos

    (Athens University of Economics and Business,CESifo)

Abstract

This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main findings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidize labour; (ii) a Pareto improving means to reduce inefficiently high capital taxation under discretion is for the government to place greater weight on the welfare of capitalists; (iii) capitalists and workers preferences, regarding the optimal amount of "capitalist bias", are not aligned implying a conflict of interests.

Suggested Citation

  • Konstantinos Angelopoulos & James Malley & Apostolis Philippopoulos, 2011. "Time-consistent fiscal policy under heterogeneity: conflicting or common interests?," Working Papers 142, Bank of Greece.
    • Handle: RePEc:bog:wpaper:142
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    References listed on IDEAS

    as
    1. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-174, Fall.
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    3. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
    4. Albert Marcet & Katharina Greulich, 2008. "Pareto-Improving Optimal Capital and Labor Taxes," UFAE and IAE Working Papers 733.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    5. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, May.
    6. Lansing, Kevin J., 1999. "Optimal redistributive capital taxation in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 73(3), pages 423-453, September.
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    9. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    10. Paul Klein & JosÈ-VÌctor RÌos-Rull, 2003. "Time-consistent optimal fiscal policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1217-1245, November.
    11. Azzimonti, Marina & de Francisco, Eva & Krusell, Per, 2008. "Production subsidies and redistribution," Journal of Economic Theory, Elsevier, vol. 142(1), pages 73-99, September.
    12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    13. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 2010. "Supply Side Interventions and Redistribution," Economic Journal, Royal Economic Society, vol. 120(543), pages 105-130, March.
    14. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
    15. Martin, Fernando M., 2010. "Markov-perfect capital and labor taxes," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 503-521, March.
    16. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
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    Citations

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    Cited by:

    1. George Economides & Anastasios Rizos, 2018. "Optimal Taxation and the Tradeoff Between Efficiency and Redistribution," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 10(1), pages 1-43, January.
    2. Costas N. Kanellopoulos, 2012. "Employment and worker flows during the financial crisis," Economic Bulletin, Bank of Greece, issue 36, pages 31-41, April.
    3. Faidon Kalfaoglou, 2012. "Bank capital adequacy framework," Economic Bulletin, Bank of Greece, issue 36, pages 43-81, April.
    4. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James, 2011. "The distributional consequences of tax reforms under market distortions," SIRE Discussion Papers 2011-73, Scottish Institute for Research in Economics (SIRE).
    5. Wei Jiang, 2014. "Optimal taxation and labour wedge in models with equilibrium unemployment," Studies in Economics 1407, School of Economics, University of Kent.
    6. Angelopoulos, Konstantinos & Jiang, Wei & Malley, James R., 2013. "Tax reforms under market distortions in product and labour markets," European Economic Review, Elsevier, vol. 61(C), pages 28-42.
    7. Papaspyrou Theodoros, 2012. "EMU sustainability and the prospects of peripheral economies," Economic Bulletin, Bank of Greece, issue 36, pages 7-29, April.
    8. Konstantinos Angelopoulos & Bernardo X. Fernandez & James Malley, 2010. "The distributional consequences of supply-side reforms in general equilibrium," Working Papers 2010_26, Business School - Economics, University of Glasgow, revised Jun 2012.
    9. Jiang Wei, 2019. "Optimal taxation under equilibrium unemployment and economic profits," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(1), pages 1-21, January.
    10. George Economides & Apostolis Philippopoulos, 2012. "Are User Fees Really Regressive?," CESifo Working Paper Series 3875, CESifo.
    11. Angelopoulos, Konstantinos & Fernandez, Bernardo X. & Malley, James R., 2010. "The Distributional Consequences of Supply-Side Reforms in General Equilibrium," SIRE Discussion Papers 2010-85, Scottish Institute for Research in Economics (SIRE).

    More about this item

    Keywords

    Optimal fiscal policy; Markov-perfect equilibrium; heterogeneous agents;

    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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