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Time-consistent consumption taxation

Laczo, Sarolta and Rossi, Raffaele (2015) Time-consistent consumption taxation. CFM discussion paper series (CFM-DP2015-08). Centre For Macroeconomics, London, UK.

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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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2015 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 14 Dec 2017 11:56
Last Modified: 25 Jul 2019 23:25
URI: http://eprints.lse.ac.uk/id/eprint/86317

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