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Time-Consistent Consumption Taxation

Wednesday 22 October 2014, 1.00PM to 2.00pm

Speaker(s): Raffaele Rossi (Lancaster)

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.

JEL classification: E62, H21.

Keywords: fiscal policy, Markov-perfect policies, consumption taxation, variable capital utilisation, endogenous government spending‌

Location: ARRC Auditorium A/RC014

Admission: All welcome