Fiscal and Monetary Policies in a Transactions‐Based Endogenous Growth Model with Imperfect Competition

This paper's model is capable of explaining the empirical evidence on the mixed growth‐rate effects of fiscal and monetary policies and a nonlinear inflation–growth relation. When monopoly power in the product market is strong/weak, an increase in the money growth rate or the income tax rate promotes/reduces the output growth rate through lowering/raising the equilibrium gross markup and increasing/reducing the net rate of return on capital. The fact that money can generate a positive growth rate effect allows for the appearance of a nonlinear inflation–growth relation. Such a nonlinear relation cannot be caused by changes in the income tax rate.     

FIRST‐BEST FISCAL POLICY WITH SOCIAL STATUS*

This paper examines the first‐best fiscal policy in a stochastic, infinite‐horizon representative agent model that exhibits consumption‐enhanced as well as wealth‐enhanced social status in the household utility. We show that the first‐best labour tax rate is a positive constant that is used to correct negative consumption externalities. The first‐best tax rate on capital income is also positive in order to overturn agents' status‐seeking capital over‐accumulation. Moreover, we find that in sharp contrast to a conventional automatic stabilizer, the first‐best capital tax rate moves in the opposite direction with shocks to firms' production technology, thus exacerbating the business cycle.     

Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two‐period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump‐sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare‐improving.     

Taxation of Mobile Factors as Insurance under Uncertainty

This paper considers the effects of the taxation of mobile factors, i.e., capital, under uncertainty. The wages earned by residents of a jurisdiction are uncertain due to random shocks. Since the uncertain wages in a jurisdiction depend on the amount of mobile capital employed in the jurisdiction, and since taxation alters the quantity of capital employed, taxation affects the riskiness of uncertain wages. In particular, the taxation of capital moderates the fluctuation of uncertain wages, thereby providing insurance. For this reason, jurisdictions use distortionary capital taxation even if lump‐sum taxation is available. In addition, this insurance effect counteracts the tendency toward too low tax rates on capital arising from tax competition, and possibly improves the efficiency of tax competition.     

Variety‐Controlling Public Policy Under Addiction and Saturation

This paper constructs a tractable general equilibrium model for investigating the dissimilar effects of addiction and saturation on consumption and public policy. By introducing an industry‐specific intertemporal consumption externality, we provide clear analytical results that a lump‐sum subsidy for firms can increase welfare in the presence of a negative externality (saturation). A tax can accomplish the same given a positive externality (addiction). Unlike existing studies of cultural goods, these results are not based on assumptions concerning exogenous different preferences across groups, but rather on conventional monopolistic competition and consumption habit formation models in macroeconomics.     

The dual nature of public goods and congestion: the role of fiscal policy revisited

Abstract The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption‐based instruments in conjunction with the income tax. An income tax‐financed increase in government spending dominates both lump‐sum and consumption tax‐financing. Replacing the lump‐sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.     

Optimal Capital Income Taxation with Means‐tested Benefits

This paper studies the interaction between capital income taxation and a means‐tested age pension. Our results document that the existence of a social insurance program financed from general revenue puts an upward pressure on the optimal tax rate. We also show that there is a negative relation between taper (benefit‐reduction) and optimal capital income tax rates. The potential welfare gain from optimizing capital taxation in the presence of a universal retirement transfer system is relatively higher. However, when the transfer is substantially means tested, the gain is lower, because the means test effectively operates as a tax on retirement capital.     

Median‐voter Equilibria in the Neoclassical Growth Model under Aggregation*

We study a dynamic version of Meltzer and Richard's median‐voter model where agents differ in wealth. Taxes are proportional to income and are redistributed as equal lump‐sum transfers. Voting occurs every period and each consumer votes for the tax that maximizes his welfare. We characterize time‐consistent Markov‐perfect equilibria twofold. First, restricting utility classes, we show that the economy's aggregate state is mean and median wealth. Second, we derive the median‐voter's first‐order condition interpreting it as a tradeoff between distortions and net wealth transfers. Our method for solving the steady state relies on a polynomial expansion around the steady state.     

Income and substitution effects of fiscal policy on work effort

The focus of this paper is twofold. First, it examines the impact on work effort of changes in government purchases financed with lump‐sum taxes, in a neoclassical framework, with respect to four industrialised countries. Second, it reconsiders the expenditure–work effort relationship in a broader conceptual context that allows for distortionary taxation and a disaggregation of the income and substitution effects. Our findings are shown to cast doubt on the empirical plausibility of the prevailing (neoclassical and New Keynesian) models which seem to rely heavily on the lump‐sum tax notion, thus ignoring the substitution effects of distortionary taxation.     

Taxation of capital income in overlapping generations economies

Whether capital income should be taxed in overlapping generations economies is vividly discussed. It is shown that intergenerational lump‐sum taxes cannot implement the Golden Rule allocation when agents have private information on their earnings potential. Hence, the seminal Atkinson–Stiglitz result that optimal income taxation pre‐empts any role for indirect taxation cannot be interpreted to imply that capital income taxation (affecting intertemporal relative prices) should not be taxed. Specifically, capital income should unambiguously be taxed in small open economies, and the optimal tax rate depends inversely on the elasticity of total savings to disposable income and the after‐tax rate of return.     

Cross‐Subsidies,and the Elasticity of Informality to Social Expenditures: The Case of Mexico's Seguro Popular

How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? How is it affected when the tax rate changes along with the generosity of these transfers? In our search model, taxes are levied on formal‐sector workers as a proportion of their wage. Transfers, in contrast, are lump‐sum and are received by both formal and informal workers. This implies that high‐wage formal workers subsidize low‐wage formal workers as well as informal workers. We calibrate the model to Mexico and perform counterfactuals. We find that the size of the informal sector is quite inelastic to changes in taxes and transfers. This is due to the presence of search frictions and to the cross‐subsidy in our model: for low‐wage formal jobs, a tax increase is roughly offset by an increase in benefits, leaving the unemployed approximately indifferent. Our results are consistent with the empirical evidence on the recent introduction of the “Seguro Popular” healthcare program.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

LONG‐RUN GROWTH AND WELFARE EFFECTS OF TAX REFORM

This paper introduces an endogenously‐determined fertility rate into a Romer‐type endogenous growth model and, accordingly, investigates the effects on fertility, economic growth and social welfare of a revenue‐neutral tax reform that involves switching from an income tax to a consumption tax. We show that, in a departure from the existing literature, tax reform could be harmful, rather than favourable, to both growth and welfare, due to an endogenous fertility rate. We also conduct a simple numerical analysis to investigate under what conditions the negative effect on growth and welfare occurs.     

HOW HAS THE CRISIS OF 2008–09 AFFECTED SUBJECTIVE WELL‐BEING? EVIDENCE FROM 25 OECD COUNTRIES

This paper uses life satisfaction data of almost 140,000 individuals in 25 OECD countries to study how changes in the rates of GDP growth, unemployment, and inflation during the macroeconomic crisis of 2008–09 have affected subjective well‐being. The relative contributions of the three macroeconomic variables to individuals’ life satisfaction are used to assess how each country performed on balance during the crisis. This approach follows a recent trend of using subjective well‐being data for monitoring economic performance and for policy appraisal. We find that in the countries most strongly affected by the crisis, the effects on an average citizen's well‐being may be of a similar magnitude as the effects of the most serious personal life events. The main driver of these effects is the drop in GDP, whose impact is aggravated by the increase of unemployment. Though the inflation rate went down in several of the countries, the effect was too weak to significantly reduce the negative effect of the changes in GDP and unemployment. The results show that GDP fluctuations are important drivers of subjective well‐being.     

Inflation Adjustment and Labour Market Structures: Evidence from a Multi‐country Study*

The impact of labour market structures on the response of inflation to macroeconomic shocks is analysed empirically. Results based on a 20‐country panel show that if labour market coordination is high, the effect on inflation of movements in unemployment, import prices, tax rates and productivity is dampened, both on impact and dynamically. In contrast, monopoly power in labour supply, measured by the percentage unionisation of the workforce, appears to amplify the response of inflation to its reduced‐form determinants. These findings are attributed to the behaviour of wages following movements in demand‐ and supply‐side conditions.     

Taxation under oligopoly in a general equilibrium setting

Taxation under oligopoly is analyzed in a general equilibrium setting where the firms are large relative to the size of the economy and maximize the utility of their shareholders. Assuming that preferences are either identical and homothetic or identical and quasi‐linear, then the oligopoly model is an aggregative game, which greatly simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump‐sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. A profits tax is shown to be superior to a lump‐sum tax. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.     

Capital taxation in a dynamic general equilibrium setting

The familiar two-factor, two-commodity incidence model is extended to a dynamic setting in which the supply of capital is variable and the government can use money or bonds to balance its budget in addition to neutral lump sum taxation. The dynamic incidence effects of a sectoral tax on capital are qualitatively similar to the static incidence effects when the government balances its budget with neutral taxes, but are qualitatively different when the government uses money or bonds. In this case, while capital bears the burden of the tax in the short run, it is able to shift it in the long run.     

Homeownership,Mobility, And Local Income Redistribution

Regions are characterized by different homeownership rates. Homeowners and renters differ in their mobility costs, renters having lower mobility costs. This paper analyses how the presence of those different types of households affects income sorting and tax differences between local jurisdictions. To this aim, we analyze a model of local income redistribution with mobile (renter) and immobile (homeowner) households. Linear income taxes finance a lump sum transfer. Policies are determined endogenously through voting. In such a framework, if there are no or only few homeowners, no income‐sorting equilibrium exists. Above a certain threshold for the homeownership rate we find an inverted U‐shaped relationship between tax differences and homeownership rates, such that tax differences between jurisdictions are highest for intermediate homeownership rates.     

International Income Transfer under Imperfect Competition

This paper examines the effects of an international income transfer under international monopoly. One of the markets in the donor country is monopolized and there exist two distinct types of agent: monopolist and factor owners. The transfer is provided by the agents with different lump sum tax (burden‐share) rates. The burden‐share rate plays a key role concerning the welfare effects of a transfer. We show that the government of the donor country can raise both its social welfare and the wellbeing of the recipient country by providing a further transfer and by simultaneously adjusting the burden‐share rates.     

Imperfect Capital Mobility and Local Government Behaviour in a Two‐Period Economy

One clear result in the tax competition literature is that, when head taxes on immobile residents are available, the optimal capital tax rate for local government is zero. However, zero tax rate, when resident taxes are available, is incompatible with the phenomenon actually observed. In most countries, local governments use capital taxes as policy variables for choosing a nonzero tax rate. This paper presents a model of a two‐period economy with imperfect mobile capital to explain the behaviour of local government providing capital subsidies on capital. It further examines an equilibrium tax rate where local government’s objectives include Niskanen‐type revenue‐maximizing.