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Time-Consistent Consumption Taxation

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  • Sarolta Laczó

    () (Bank of England
    Centre for Macroeconomics (CFM))

  • Raffaele Rossi

    () (Department of Economics Management School Lancaster University)

Abstract

We characterise optimal fiscal policies in a Real Business Cycle model when the government has access to consumption taxation but cannot credibly commit to future policies. 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.

Suggested Citation

  • Sarolta Laczó & Raffaele Rossi, 2015. "Time-Consistent Consumption Taxation," Discussion Papers 1508, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1508
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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, Rimini Centre for Economic Analysis, vol. 10(1), pages 1-43, January.
    2. Alejandro Forcades, 2019. "The optimal tax mix with underground labor," Economics Bulletin, AccessEcon, vol. 39(1), pages 214-222.
    3. Vasilev, Aleksandar, 2018. "Optimal fiscal policy with utility-enhancing government spending, consumption taxation and a common income tax rate: the case of Bulgaria," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics.
    4. George Economides & Apostolis Philippopoulos & Anastasios Rizos, 2020. "Optimal tax policy under tax evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 339-362, April.
    5. Vasilev, Aleksandar, 2018. "Optimal fiscal policy with Epstein-Zin preferences and utility-enhancing government services: lessons from Bulgaria (1999-2016)," EconStor Preprints 183134, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

    Fiscal Policy; Markov-perfect Policies; Consumption Taxation; Variable Capital Utilisation; Endogenous Government Spending;

    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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