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Optimal Fiscal Policy with Endogenous Product Variety

  • Fabio Ghironi

    (Boston College)

  • Sanjay K. Chugh

    (University of Maryland)

We study optimal fiscal policy when product variety is endogenous and products are long-lived assets for firms. Depending on preferences, product creation should be either subsidized or taxed in the long run, by subsidizing or taxing dividends. In the most empirically relevant case, dividends should be taxed quite heavily (positive capital income taxation). Moreover, regardless of preferences, labor income tax smoothing is not optimal. The standard deviation of the optimal tax rate is much larger than tax-smoothing results. Both long-run dividend taxation and lack of tax smoothing follow from the long-lived nature of products with optimally priced product creation.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 812.

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Date of creation: 2010
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Handle: RePEc:red:sed010:812
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