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Tax Reform with Useful Public Expenditures
Author(s) -
CASSOU STEVEN P.,
LANSING KEVIN J.
Publication year - 2006
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2006.00282.x
Subject(s) - economics , neutrality , tax reform , consumption (sociology) , public economics , constraint (computer aided design) , revenue , welfare , consumption tax , government (linguistics) , microeconomics , monetary economics , indirect tax , market economy , finance , law , mechanical engineering , social science , linguistics , philosophy , sociology , political science , engineering
We examine the effects of tax reform in an endogenous growth with two types of useful public expenditures. The optimal fiscal policy shifts the tax base to private consumption and generally requires a change in the size of government. If a tax reform holds the size of government fixed to satisfy a revenue‐neutrality constraint, then the reform will be suboptimal; theory alone cannot tell us if welfare will be improved. For some model calibrations, we find that a revenue‐neutral consumption tax reform can result in large welfare gains. For other quite plausible calibrations, the exact same reform can result in tiny or even negative welfare gains as the revenue‐neutrality constraint becomes more severely binding. Overall, our results highlight the uncertainty surrounding the potential welfare benefits of fundamental tax reform.