Public expenditures taxation and welfare measurement

Pedro Cavalcanti Ferreira

No 239, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: this article addresses the welfare and macroeconomics effects of fiscal policy in a frarnework where govemment chooses tax rates and the distribution of revenues between consumption and investment. We construct and simulate a model where public consumption affects individuaIs' utility and public capital is an argument of the production function. The simulations suggest that by simply reallocating expenditures from consumption to investment, the govemment can increase the equilibrium leveIs of capital stock, hours worked, output and labor productivity. Funhennore, we 'show that the magnitude and direction of the long run impact of fiscal policy depends on the size of the elasticity of output to public capital. If this parameter is high enough, it may be the case that capital stock, within limits, increases with tax rates.

Date: 1994-05
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