Time-consistent consumption taxation

Sarolta Laczo and Raffaele Rossi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We characterise optimal fiscal policies in a Real Business Cycle model when the government has access to consumption taxation but cannot credibly commit to future policies. 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 policymaker’s ability to commit is of secondary importance if consumption is taxed optimally.

Keywords: fiscal policy; Markov-perfect policies; consumption taxation; variable capital utilisation; endogenous government spending. (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://eprints.lse.ac.uk/86317/ Open access version. (application/pdf)

Related works:
Journal Article: Time-consistent consumption taxation (2020)
Working Paper: Time-Consistent Consumption Taxation (2018)
Working Paper: Time-Consistent Consumption Taxation (2015)
Working Paper: Time-consistent consumption taxation (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:86317

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