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Consumption taxation to finance pension payments

Kilian Ruppert, Matthias Schön () and Nikolai Stähler ()

No 47/2021, Discussion Papers from Deutsche Bundesbank

Abstract: This paper assesses how a permanent shift from financing a public pay-as-you-go pension by direct (labour income) taxation towards financing it by indirect(consumption) taxation affects the economy and welfare. To this end, we use anoverlapping-generations-augmented two-region general equilibrium framework withsearch frictions on the labour market. The analysed tax reform partially shifts thetax burden from domestic to foreign producers and lowers marginal costs of domes-tic production and generates positive domestic macroeconomic effects. In addition,the partial postponement of a household's tax burden to retirement leads to highersavings and increases domestic assets. However, for some time after implementationof the tax reform, the policy-induced increase in consumption costs makes retireesand households close to retirement worse off. Moreover, the increase in domesticnet foreign assets implies that consumption of foreign households eventually falls,which stands in contrast to what is commonly found in models without an endoge-nous savings motive.

Keywords: Fiscal devaluation; OLG models; Pension system; Optimal taxation (search for similar items in EconPapers)
JEL-codes: E24 E62 H21 H55 J26 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-age, nep-dge, nep-lma, nep-mac, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:472021

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