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Fiscal policy under a minimum‐time objective
Author(s) -
Dai Darong
Publication year - 2018
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12153
Subject(s) - economics , fiscal policy , consumption (sociology) , tax rate , welfare , capital income , budget constraint , balanced budget , endogenous growth theory , income tax , monetary economics , macroeconomics , constraint (computer aided design) , tax policy , microeconomics , public economics , tax reform , international taxation , human capital , market economy , mechanical engineering , social science , engineering , sociology , politics , political science , law , economic growth
In an endogenous growth model, we characterize the fiscal policy driven by a minimum‐time objective of economic development. We find that in equilibrium government should levy the highest possible consumption taxes, reduce public expenditures to the lowest possible level, and keep labor income tax rate and capital income tax rate satisfy a substitution relationship at the balanced budget constraint. We also identify the condition under which income tax rate should be set to zero. We further find that the equilibrium fiscal policy is equivalent to the growth‐maximizing fiscal policy, whereas it generally deviates from the welfare‐maximizing fiscal policy. We hence identify a circumstance where setting the policy goal of reaching an economic‐performance target as soon as possible cannot be justified in the sense of maximizing the welfare of households.