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Optimal Fiscal Policy with Consumption Taxation
Author(s) -
MOTTA GIORGIO,
ROSSI RAFFAELE
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12544
Subject(s) - economics , monopolistic competition , consumption (sociology) , fiscal policy , government spending , debt , consumption tax , general equilibrium theory , monetary economics , public finance , microeconomics , macroeconomics , public economics , international taxation , tax reform , welfare , monopoly , market economy , social science , sociology
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.