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Tax Base and Crowding‐in Effects of Balanced Budget Fiscal Policy
Author(s) -
Linnemann Ludger
Publication year - 2004
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.0347-0520.2004.00363.x
Subject(s) - economics , monetary economics , balanced budget , monopolistic competition , consumption (sociology) , consumption tax , fiscal policy , unemployment , general equilibrium theory , indirect tax , macroeconomics , crowding out , labour economics , tax reform , microeconomics , public economics , monopoly , social science , sociology , politics , political science , law
A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax‐financed increase in government expenditures can lower the tax rate through a demand‐induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.