Fiscal Policy Through Time-Varying Tax Rates: If and How

Martin Kaufman

No 2000/170, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates if there are circumstances where time-varying tax rates could improve welfare and whether such policy can effectively be implemented in practice. While, in principle, variable taxes could improve welfare in some cases, the paper highlights the very particular circumstances that need to prevail. With liquidity constraints, a consumption-tax break is in a better footing to boost consumption and welfare than an income-tax break. A hike in consumption taxes can also be used to restrain consumption and improve welfare under time-consistency problems induced by hyperbolic discounting. However, variable taxes are subject to serious implementation problems fettering their use.

Keywords: WP; tax rate; Counter-cyclical fiscal policy; taxation; credit constraint; hyperbolic discounting; consumption path; constraint multiplier; allocation of consumption; liquidity constraint; Consumption; Consumption taxes; Labor supply; Credit (search for similar items in EconPapers)
Pages: 25
Date: 2000-10-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2000/170

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