Template-Type: ReDIF-Paper 1.0
Author-Name: Sarolta Laczo
Author-Name-First: Sarolta
Author-Name-Last: Laczo
Author-Name: Raffaele Rossi
Author-Name-First: Raffaele
Author-Name-Last: Rossi
Title: Time-consistent consumption taxation
Abstract: We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. 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.
Creation-Date: 2014
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/ConsumptionTaxation.pdf
File-Format: application/pdf
Number: 67495267
Classification-JEL: E62, H21
Keywords: fiscal policy, Markov-perfect policies, consumption taxation, variable capital utilisation, endogenous government spending
Handle: RePEc:lan:wpaper:67495267