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Time-consistent consumption taxation

Author

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  • Laczo, Sarolta
  • Rossi, Raffaele

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 policymaker’s ability to commit is of secondary importance if consumption is taxed optimally.

Suggested Citation

  • Laczo, Sarolta & Rossi, Raffaele, 2015. "Time-consistent consumption taxation," LSE Research Online Documents on Economics 86317, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:86317
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    File URL: http://eprints.lse.ac.uk/86317/
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    References listed on IDEAS

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    Cited by:

    1. repec:zbw:espost:173175 is not listed on IDEAS
    2. George Economides & Anastasios Rizos, 2017. "Optimal taxation and the tradeoff between efficiency and redistribution," DEOS Working Papers 1701, Athens University of Economics and Business.
    3. repec:rnp:ecopol:ep1703 is not listed on IDEAS
    4. repec:lus:reveco:v:69:y:2018:i:1:p:1-16:n:3 is not listed on IDEAS
    5. 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.

    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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