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Janusz Kudla (), Agata Kocia, Katarzyna Kopczewska (), Robert Kruszewski and Konrad Walczyk ()
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Janusz Kudla: University of Warsaw
Agata Kocia: University of Warsaw
Robert Kruszewski: Warsaw School of Economics

Equilibrium. Quarterly Journal of Economics and Economic Policy, 2015, vol. 10, issue 2, 9-30

Abstract: The paper presents a fiscal policy model integrating tax avoidance, the complexity of tax systems and the fiscal solvency hypothesis within the traditional framework of tax competition. Furthermore, we take into account: taxation of consumption, possibility of capital income shifting and foreign goods purchases (untaxed in the destination country). We conclude that if fiscal policy is by no means unfettered the equilibrium can be allocation efficient, provided that the marginal rate of substitution between private and public goods is one. The changes in public debt affect tax rates in equilibrium differently: positively for the consumption tax rate and negatively for the labor tax rate. The change of the capital tax depends on the level of economic internalization. This approach is especially useful during a solvency crisis and can be applied to predict tax rates’ adjustment when the bonds issuance decreases or public debt accelerates.

Keywords: capital income tax; consumption tax; fiscal policy; public debt; tax competition (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:pes:ierequ:v:10:y:2015:i:2:p:9-30