Dynamic Fiscal Solvency with Consumption and Capital Taxes

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

Central European Economic Journal, 2018, vol. 5, issue 52, 96-108

Abstract: To finance public expenditure a government needs to raise revenue, which mainly comes from taxes and borrowings. During a financial crisis, however, financing of budget deficit is particularly difficult because of a rise in debt servicing costs that crowd out other expenses and raise the concern for government solvency. In extreme cases, governments are constrained to tax, as borrowing opportunities are strictly limited or unavailable. Still, governments can choose from tax menu options (income and consumption taxes), given the flexibility of the tax mix. This article presents a long-term dynamic model of fiscal solvency that shows the equilibrium the revenue maximising government can obtain with reasonable tax rates when capital income can be shifted and there are constraints on the consumption tax. Specifically, the solution predicts a positive level of bonds in the long-term equilibrium and the tax rates dependent positively on the abundance of the tax bases.

Keywords: dynamic modelling; capital tax; consumption tax; fiscal solvency (search for similar items in EconPapers)
JEL-codes: C61 H21 H26 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:vrs:ceuecj:v:5:y:2018:i:52:p:96-108:n:9

DOI: 10.1515/ceej-2018-0013

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