Template-Type: ReDIF-Paper 1.0
Author-Name: William John Tayler
Author-Name-First: William John
Author-Name-Last: Tayler
Author-Name: Roy Zilberman
Author-Name-First: Roy
Author-Name-Last: Zilberman
Title: Taxation, Credit Spreads and Liquidity Traps
Abstract: We argue that optimal state-contingent variations in asset taxation increase welfare, alter the monetary policy transmission mechanism and insure against liquidity traps. These findings are explained by an endogenous relationship between taxation, the effective rate of return on assets, the inflationary output gap and credit spreads. Such unique link operates via a working-capital cost channel, and affords the policy maker an additional degree of freedom in stabilizing the economy. Optimal policy calls for lowering (increasing) asset taxation following adverse financial (demand) shocks. Severe financial contractions, nonetheless, warrant a more limited tax cut to minimize the occurrence of unintended liquidity traps induced by (otherwise optimal) large fiscal subsidies.
Creation-Date: 2017
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/TaylerZilberman_2018_Unconventional_Tax_.pdf
File-Format: application/pdf
Number: 173174116
Classification-JEL: E32, E44, E52, E58, E62, E63
Keywords: Asset Taxation, Optimal Policy, Risk Premium, Credit Cost Channel, Zero Lower Bound
Handle: RePEc:lan:wpaper:173174116