Tax Cuts, Redistribution, and Borrowing Constraints

Tommaso Monacelli and Roberto Perotti

No 408, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: With perfect credit markets, any (lump-sum) tax redistribution is neutral. We study the e¤ects of a tax redistribution in an economy with heterogenous agents and borrowing constraints. Under ?exible prices, a tax redistribution that favors "the poor" (i.e., the credit constrained) is neutral, or, possibly, even mildly contractionary. When nominal prices are sticky, that result is overturned: a tax redistribution from the savers to the constrained borrowers is expansionary on output. Key to the non-neutrality result is the agents?heterogenous sensitivity to movements in the credit premium.

Date: 2011
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