A dynamic theory of the excess burden of taxation

Anastasios Karantounias

No 1356, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper organizes, reinterprets and extends the dynamic theory of optimal fiscal policy with a representative agent, by highlighting the underlying principles that hide under each particular economic environment. I use a generalized version of recursive preferences in order to allow for richer asset pricing implications. I allow markets to be complete or incomplete and study a policymaker that acts under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier that makes precise the notion of ``tax-smoothing.'' Variants of a law of motion in terms of the inverse excess burden emerge in each environment. The basic policy prescription is simple and intuitive and revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today.

Date: 2019
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1356

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