Optimal Fiscal Policy with Consumption Taxation

Raffaele Rossi, Giorgio Motta

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Abstract

We characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker 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 labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.

Original languageEnglish
Pages (from-to)139-161
Number of pages23
JournalJournal of Money, Credit and Banking
Volume51
Issue number1
DOIs
Publication statusPublished - 3 Aug 2018

Keywords

  • E62
  • H21
  • consumption taxation
  • endogenous government spending
  • fiscal policy

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