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Optimal Fiscal Policy with Consumption Taxation

Giorgio Motta () and Raffaele Rossi ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: We characterise optimal fiscal policies in a tractable Dynamic General Equilibrium model with monopolistic competition and endogenous public spending. The government has access to consumption taxation, as alternative to labour income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policy-maker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labour income taxation. Then, we quantify numerically each of these gains on households’ welfare by calibrating the model on the US economy.

Pages: 26 pages
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:239

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