Tax Structure, Welfare, and the Stability of Equilibrium in a Model of Dynamic Optimal Fiscal Policy (original) (raw)

Multiple equilibria and progressive taxation of labor income

Economics Letters, 1999

This paper shows that in a one-sector real business cycle model with strong increasing returns in production, progressive taxation of labor income can stabilize the economy against sunspot ‡uctuations, even when the capital tax schedule is ‡at. This result is consistent with the U.S. tax code in which labor-income taxation is more progressive than capital-income taxation. . I thank Kevin Lansing for helpful comments and suggestions, and Chia-Hui Chiu for excellent research assistance.

Optimal nonlinear income taxation with productive government expenditure

International Review of Economics & Finance, 2012

This paper develops an endogenous growth model with a production externality and nonlinear income taxation, and uses it to examine how the fiscal authority devises its nonlinear tax structure from the viewpoint of welfare maximization. It is found that, in the Barro (1990) model, Pareto optimality can be achieved if both policy instruments for the tax scalar and the extent of the tax progressivity/regressivity are set optimally. externality associated with the provision of public good by Barro (1990) and .

An Analysis the Effect of Capital Taxation on Allocation of Resources: A Dynamic Equilibrium Model Approach

iranian economic review, 2016

T he return of capital is fundamental to the intertemporal allocation of resources by changing the consumption behavior and capital accumulation over time. Taxation on return of capital increases the marginal product of capital, meaning that capital stock is lower than when capital is not taxed, which results decreased growth and welfare in steady state. This paper studies the impact of capital income taxation on capital stock, output and welfare in a dynamic optimization model. Theoretical and experimental results indicate that any attempt to decrease taxation on return of capital in Iran's economy, will be eventually reached to a higher capital formation, higher output and consumption per capita in the steady state. Finally, leads to higher welfare level in the steady state.

OPTIMAL FISCAL AND TAX POLICIES IN A GENERAL EQUILIBRIUM MODEL OF GROWTH

2004

Abstract: This paper continues the study of optimal second-best economic policy in a growing general equilibrium economy. It considers the case in which a benevolent Ramseytype government chooses optimally the income tax rate, as well as the allocation of the collected tax revenue among public consumption services, public investment and transfer payments. It then studies the properties of the chosen policies and their implications for the macro economy. Keywords: Second-best policy; Growth; General equilibrium.

Optimal dynamic taxation

1999

This paper reviews the recent optimal dynamic tax literature, and links the results from dynastic one-person economies, dynastic heterogeneous individual economies and overlapping generations economies. The paper shows that the second best labour tax is positive, and further analyses the dynamic paths of capital and labour taxes, as well as the economy's adjustment under the optimal programme. Furthermore, we prove that in a heterogeneous individual economy, every individual's most preferred capital tax in steady state is zero. The optimal labour tax in a heterogeneous individual framework is similar to the optimal labour tax in a one-person economy.

The welfare effects of tax simplification: a general-equilibrium analysis

1994

T h i s paper employs a dynamic general-equilibrium model to analyze various schemes for simplifying the U.S. tax system, such as a uniform tax levied on all types of income regardless of source, and the elimination of specific tax breaks like the depreciation allowance. Under each scheme, the government selects a balanced-budget fiscal policy (consisting of tax rates and the level of public expenditures) which maximizes household welfare given the constraints imposed by the particular tax system. We find that a uniform tax system does almost as well as a system with separate taxes on labor and capital incomes, provided that a depreciation allowance is maintained. Without the depreciation allowance, a uniform tax system significantly reduces household welfare, even though marginal tax rates are lower under this scheme. The welfare differences between the various distortionary tax systems are much smaller than the potential welfare gains from switching to a system of nondistortionary, lump-sum taxes. The various tax systems are also shown to display very different behavior for the movement of tax rates and aggregate economic variables over the business cycle.

A Note on Balanced-Budget Income Taxes and Aggregate (In)Stability in Multi-Sector Economies

Macroeconomic Dynamics

We examine the impact of balanced-budget labor income taxes on the existence of expectation-driven business cycles in a two-sector version of the Schmitt-Grohé and Uribe (SGU) [(1997) Journal of Political Economy 105, 976–1000] model with constant government expenditures and counter-cyclical taxes. Our results show that the destabilizing impact of labor income taxes strongly depends on the capital intensity difference across sectors. Local indeterminacy is indeed more likely when the consumption good sector is capital intensive, as the minimal tax rate decreases, and less likely when the investment good sector is capital intensive, as the minimal tax rate increases. The implication of this result can be quantitatively significant. Indeed, when compared to SGU, local indeterminacy can be either completely ruled out for all OECD countries when the investment good is sufficiently capital intensive or drastically improved, delivering indeterminacy for a larger set of OECD countries, if ...

Multiple Objectives in Fiscal Policy: The Case of Taxation

SSRN Electronic Journal

Instead of a single objective such as utility maximization or social welfare maximization, this paper discusses the determination of a fiscal policy by several potential objectives. Besides pure economic factors, political and social factors must affect decisions in fiscal policy. To study multiple objectives in fiscal policy, this paper takes taxation as an example. To under-stand taxation and to compare different options of taxation, we set up an overlapping-generations life-cycle model to analyze implications of various tax options on wealth accumulation, social welfare, political support, and economic equality.

A Dynamic Model for an Optimal Consumption Tax Rate

Qeios, 2023

Following Ramsey, the existing literature on optimal taxation only compares the pre and the post-tax market equilibriums in order to account for the e ciency losses. However, when the government imposes an ad valorem tax on the consumer, the buyer's price jumps to the pre-tax equilibrium price plus the amount of the tax, and the supply and the demand of the taxed commodity then adjust over time to bring the new post-tax market equilibrium. The existing literature does not take into account the e ciency losses during the adjustment process while computing the optimal ad valorem taxes. This paper shows how adjustment process influences the optimal ad valorem taxes, minimizing the e ciency losses (output and/ or consumption lost) during the dynamic adjustment process as well as the post-tax market equilibrium. (JEL H20, H21, H22)

2013a), Progressive Taxation and Macroeconomic (In)stability with Productive Government Spending,Journal of Economic Dynamics and Control

2020

This paper systematically examines the interrelations between a progressive income tax schedule and macroeconomic (in)stability in an otherwise standard one-sector real business model with productive government spending. We analytically show that the economy exhibits indeterminacy and sunspots only if the equilibrium wage-hours locus is positively sloped and steeper than the household's labor supply curve. Unlike in the framework with useless public expenditures, a less progressive tax policy may operate like an automatic stabilizer that mitigates belief-driven cyclical ‡uctuations. Our quantitative analysis shows that this result is able to provide a theoretically plausible explanation for the discernible reduction in U.S. output volatility after the Tax Reform Act of 1986 was implemented.