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Optimal Fiscal Policy with Heterogeneous Agents and Capital: Should We Increase or Decrease Public Debt and Capital Taxes?

Author

Listed:
  • François Le Grand

    (ESSEC Business School)

  • Xavier Ragot

    (Sciences Po - Sciences Po, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

We analyze optimal fiscal policy in a heterogeneous-agent model with capital accumulation and aggregate shocks, where the government uses public debt, a capital tax, and a progressive labor tax to finance public spending. We first study a tractable model and show that the steady-state optimal capital tax can be positive if credit constraints are occasionally binding. However, the existence of such an equilibrium depends on the shape of the utility function. We also characterize the optimal dynamic of public debt after a public spending shock. We confirm these findings by solving for optimal policy in a general heterogeneous-agent model.

Suggested Citation

  • François Le Grand & Xavier Ragot, 2025. "Optimal Fiscal Policy with Heterogeneous Agents and Capital: Should We Increase or Decrease Public Debt and Capital Taxes?," Sciences Po Economics Publications (main) hal-05547657, HAL.
    • Handle: RePEc:hal:spmain:hal-05547657
    DOI: 10.1086/734877
    Note: View the original document on HAL open archive server: https://hal.science/hal-05547657v1
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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