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Time-Consistent Consumption Taxation

Sarolta Laczó () and Raffaele Rossi ()

No 857, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: We characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies. We consider a neoclassical economy where factor income taxation is distortionary within the period, due to endogenous labour and capital utilisation and non-tax-deductibility of depreciation. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies with consumption taxation are remarkably similar to their Ramsey counterparts. 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.

Keywords: fiscal policy; Markov-perfect policies; consumption taxation; variable capital utilisation (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
Date: 2018-04-12
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Related works:
Working Paper: Time-Consistent Consumption Taxation (2015) Downloads
Working Paper: Time-consistent consumption taxation (2015) Downloads
Working Paper: Time-consistent consumption taxation (2014) Downloads
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