The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model

Patrick Fève, Christophe Cahn and Julien Matheron

No 24-1550, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper evaluates the long-run economic effects of a fiscal rebalancing reform, namely a policy consisting in increasing consumption taxes and simultaneously lowering payroll taxes, all this in a budget neutral way. To this end, we construct a heterogeneous-agent model and compare the pre- and post-reform steady states. The model is calibrated on French data to reproduce key characteristics of disposable income and net wealth distributions. We compare the outcomes of the reform under the benchmark model with those arising in its representative-agent version. Our results indicate that while the fiscal febalancing reform stimulates aggregate labor and capital, (i) it has a larger effect on capital in the heterogeneous-agent model than in its representative-agent counterpart; (ii) it also exacerbates wealth inequality, where wealthier households capture the whole macroeconomic increase in capital. The results are left unaffected by various perturbations around the baseline calibration. Taking into account the transition between the two stady states, a welfare analysis suggests that the reform entails a welfare cost even though a majority of agents would benefit from it.

Keywords: Fiscal Policy; Fiscal rebalancing, Income & Wealth Distributions; Heterogeneous Agent Model (search for similar items in EconPapers)
JEL-codes: C54 D31 E62 (search for similar items in EconPapers)
Date: 2024-07-08
New Economics Papers: this item is included in nep-dge and nep-hme
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129469

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