 ARE CONSUMPTION TAXES PREFERABLE TO INCOME TAXES FOR PREVENTING MACROECONOMIC INSTABILITY?Macroeconomic Dynamics, 2017, vol. 21, issue 4, 1023-1058 Abstract: This paper examines the local determinacy implications of using consumption taxes and income taxes to finance a balanced budget fiscal policy for a variety of popular monetary policy rules. It is shown using a New Keynesian framework that the severity of the indeterminacy problem that arises under each tax system depends not only on the specification of the interest-rate feedback rule, but also on the magnitude of the steady state tax rate, the steady state government debt–output ratio, and the degree of price stickiness. Significant differences in the determinacy criteria across the two tax systems are found to exist. The robustness of the results is assessed by extending the baseline model to include capital accumulation and the taxation of bond interest income. From a policy perspective, our results suggest that future shifts toward indirect taxation could have nontrivial implications for the setting of monetary policy under balanced budget rules, in particular the ability of the Taylor principle to achieve determinacy. Date: 2017 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:21:y:2017:i:04:p:1023-1058_00 Access Statistics for this article More articles in Macroeconomic Dynamics from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK. |
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