TY - UNPB

T1 - Time-consistent consumption taxation

AU - Laczo, Sarolta

AU - Rossi, Raffaele

PY - 2014

Y1 - 2014

N2 - We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. 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. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.

AB - We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. 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. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.

KW - fiscal policy

KW - Markov-perfect policies

KW - consumption taxation

KW - variable capital utilisation

KW - endogenous government spending

M3 - Working paper

T3 - Economics Working Paper Series

BT - Time-consistent consumption taxation

PB - Lancaster University, Department of Economics

CY - Lancaster

ER -