The effects of fiscal policy on consumption in recessions and expansions

This paper explores in a yearly panel of nineteen OECD countries from 1970–2002 the effects of fiscal policy changes on private consumption in recessions and expansions. In the presence of binding liquidity constraints on households, fiscal policy is more effective in boosting private consumption in recessions than in expansions. The effect is more pronounced in countries characterized by a less developed consumer credit market. This happens because the fraction of individuals that face binding liquidity constraints in a recession will consume the extra income generated following an unanticipated tax cut or government spending increase.     

Tax Base and Crowding‐in Effects of Balanced Budget Fiscal Policy

A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax‐financed increase in government expenditures can lower the tax rate through a demand‐induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.     

The Household, Time Use and Tax Policy

This paper is concerned with modelling household decisions andthe welfare effects of tax policy. It seeks to emphasise theimportance of a model that incorporates household productionand can take account of the evident female labour supply heterogeneityacross two-parent families. If, after having children, someproportion of households substitute domestic for market laboursupply, the income and consumption variables used as the taxbase in most countries may be poorly correlated with livingstandards. Taxes and welfare programs based on these variablesmay increase inequality by shifting the overall tax burden tolow and middle wage families with both partners in work, awayfrom families with much higher wages and in which only one memberworks to earn the same joint market income. The paper combinesdata on time use, income, taxes and benefits to show how theytrack female labour supply over the life cycle, resulting inmuch higher tax burdens on two-earner households. (JEL D13,D91, H31, J22)     

The Design of Optimal Education Policies

This paper studies the education policy chosen by a utilitarian government. In the model, households differ in their income and in their children&'s ability; income is observed by the government, but ability is private information. Households can use private education, but cannot borrow to finance it. The government can finance education with income tax, but at the cost of blunting the individuals' incentive to exert labour market effort. The optimal education policy we derive is elitist: it increases the spread between the educational achievement of the bright and the less bright individuals, compared to private provision. It is also such that the education received by less bright individuals depends positively on their parental income. Finally, the optimal education policy is input regressive, in the sense of Arrow (1971, Quarterly Journal of Economics, 38, 175–208): households with higher income and brighter children contribute less in tuition fees towards the cost of the education system than households with lower income and less bright children.     

Tax Policy and Human Capital Formation with Public Investment in Education

This paper studies the effects of distortionary taxes and public investment in an endogenous growth OLG model with knowledge transmission. Fiscal policy affects growth in two respects: first, work time reacts to variations of prospective tax rates and modifies knowledge formation; second, public spending enhances labour efficiency but also stimulates physical capital through increased savings. It is shown that Ramsey-optimal policies reduce savings due to high tax rates on young generations, and are not necessarily growth-improving with respect to a pure private system. Non-Ramsey policies that shift the burden on adults are always growth-improving due to crowding-in effects: the welfare of all generations is unambiguously higher with respect to a private system, and there generally exists a continuum of non-optimal tax rates under which long-run growth and welfare are higher than with the Ramsey-optimal policy.     

Environmental Policy, Tax Incidence, and the Cost of Public Funds

This paper studies under what conditions a double dividend may occur in the sense that both environmental quality and employment rise. A simple static general equilibrium model is employed in which tax policy faces the dual task of internalising a negative environmental externality and raising revenue to finance public consumption. The model features a clearing labour market with both labour demand and supply and a fixed factor of production (e.g. capital). Hence, we can study tax incidence and its effect on employment, environmental quality, and the marginal cost of public funds. It is shown for the case of an upward sloping labour supply curve and less than full tax shifting by employers that a shift towards greener preferences cannot yield a double dividend, even if the fixed factor is important. However, if labour supply curve bends backwards, more environmental concern confers a double dividend.     

The general equilibrium effects of fiscal policy: Estimates for the Euro area

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the Euro area. The model takes into account distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees and transfers to households. A newly computed quarterly data set of fiscal variables is used. Our results point to the prevalence of mild Keynesian effects of public expenditures. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensations for public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. The effects are more significant on the revenue side: decreases in labor income and consumption tax rates have sizeable effects on consumption and output, while a reduction in capital income tax favors investment and output in the medium run. Finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables.     

Consumption smoothing and vulnerability in Russia

Applying bootstrapped quantile regression to the Russian Longitudinal Monitoring Survey (RLMS) data, we examine the channels through which individuals experience and seek to cope with changes in consumption. We find that married individuals living in small households, with educated heads in urban areas are better equipped to smooth consumption. Investigating the impact of idiosyncratic shocks, we find that the labour market is an important transmission mechanism allowing households to smooth their consumption but also exposing them to risk, mainly through job loss. Outside of pension payments, the formal social safety net does not facilitate consumption smoothing, thus heightening the importance of informal coping institutions. It transpires that both support from relatives/friends and home production act as important insurance mechanisms for the most vulnerable. In contrast with previous findings, it would seem that regardless of its historical, political and social roots, the garden plots and dachas, often romanticized in Russian literature, do provide a means by which ‘urban’ Russians are able to cope with economic fluctuations. We finish by stressing the important policy lessons for Russia's developing market economy.     

The role of labour demand elasticities in tax incidence analysis with heterogeneous labour

Whether labour bears full burden of household level income and consumption taxes ultimately depends on the degree of substitutability among different types of labour in production. We find more variation in incidence patterns across households with less than perfectly substitutable heterogeneous labour than with perfectly substitutable homogeneous labour in production. This finding is based on results obtained from homogeneous and heterogeneous labour general equilibrium tax models calibrated to decile level income and consumption distribution data of UK households for the year 1994. We use labour supply elasticities implied by the substitution elasticity in households' utility functions and derive labour demand elasticities from the substitution elasticity in the production function. First version received: March 1998/Final version received: April 1999     

Property rights and long-run capital

Proprietary capital falling into the public domain inefficiently decreases capital accumulation. As a consequence, the market steady state consumption underperforms the planner's by 4.6%–9.1% in a neoclassical infinitely-lived agents economy with constant returns to scale and standard empirically supported parameters. The results extend robustly to an overlapping generations economy, for which the gap is 10.5% when similarly parametrized. A policy decentralizing, in the latter, the planner's steady state instead consists of (i) subsidizing the rental rate of private capital at its depreciation rate, and (ii) taxing households' negative net position between, on the one hand, firm and depreciated capital ownership, and on the other, borrowing. Under this policy, the necessary tax rate on households' negative net position is smaller the bigger the absolute value of the latter and, hence, the bigger the corresponding monetary real balances held by households.     

Demand for international reserves: a review article

This paper examines the twofold role of the labour market in household economic risk management: as a source of household consumption risk, and as an instrument for insuring consumption against contingencies. It outlines a framework for analysing this twofold role of the labour market, and uses data from the British Household Panel Survey 1991–1996 to explore this empirically. It identifies the relative importance of the labour market, and other factors, in producing changes in the financial situation of individuals. It also implements ‘full insurance’ tests of whether unemployment and other external shocks to the household are correlated with consumption growth. It concludes that labour market factors are a dominant source of change in individuals financial situation, with a predominantly positive effect on the financial situation of the better off, and a predominantly negative impact on the financial situation of the less well off. It also finds that households are unable to fully insure their consumption against unemployment, and that as a result labour market factors pose a significant economic risk.     

Labour Tax Reform, the Good Jobs and the Bad Jobs

We analyse recent proposals to shift the tax burden away from low‐paid labour, assuming a dual labour market where the “good” high‐paying jobs are rationed. A shift in the tax burden from low‐paid to high‐paid workers has an ambiguous effect on the level of aggregate employment while the allocation of aggregate employment is further distorted. Even if the tax reform raises total employment, economic efficiency may be reduced because labour is reallocated from high‐productive to low‐productive jobs. We also find that opportunities for on‐the‐job search have important implications for the policy effects.     

Source of income effects for demand decisions and taxable consumption

The relationship between sources of income and demand decisions by the household is examined here with an eye toward the ramifications on consumption tax bases. Income sources may be important when households attach psychic and transaction costs to individual purchases or when sources are assigned via a mental accounting process. In either case, general and specific sales tax bases may be affected by changes in income composition. Empirical results indicate two important findings. First, tax exemptions can introduce significant income source effects for a general consumption tax base. Second, the importance of differential tax rates for gasoline and food-at-home strongly depends on the mix of labour, capital, retirement and non-retirement transfer pay.     

The German Savings Puzzle

Germany has one of the most generous public pension and health insurance systems of the world, yet private savings are high and remain positive until old age, even for most low income households. How can we explain what we might want to term the “German savings puzzle”? We provide a complicated answer that combines historical facts with capital market imperfections, housing, tax and pension policies. The first part of the paper describes how German households save, based on a synthetic panel of four cross sections of the German Income and Expenditure Survey (“Einkommens- und Verbrauchsstichproben”) collected between 1978 and 1993. The second part links saving behaviour with public policy, notably tax and pension policy.     

Growth,Employment and Taxation with Distortions in the Goods and Labour Market

Abstract. This paper analyses taxation in the presence of distortions in goods and labour markets in an endogenous growth model. The government disposes of capital, labour and consumption taxes. It is shown that the market solution leads to suboptimally low levels of growth and employment. However, available tax instruments are sufficient to attain the first‐best growth path in this economy. The paper further explores the relative distortion of capital and labour taxes. For plausible parametrisations of the model, lowering capital taxes dominate reductions in labour taxes in welfare terms.     

节能减排政策传导机制及效果研究——以重庆市节能减排政策体系为例

"十二五"期间,节能减排作为调结构、扩内需的重要方式以及可持续发展的重要举措,被提上了议事日程。作为老工业基地之一的重庆市,资源消耗量与废物排放量持续增加,形势不容乐观。拟对重庆市现行节能减排政策传导机制及效果进行深入研究,以期推动重庆市经济的可持续发展。研究发现,重庆市促进节能减排以实施命令控制型政策和排污收费政策为主,市场化手段仍不成熟,如排污权交易活跃度低、相关税收政策缺失等。基于这些问题,结合西方国家经验与重庆市资源环境市场特点,提出构建绿色税收体系,加快排污权交易市场建设,完善市场机制等建议。     

Tobacco consumption and policy in the United Kingdom

In recent years, several structural changes and sequences of shocks have occurred in the market for tobacco in the UK, including an explosive growth in smuggling. This study examines whether it is still possible to estimate a reliable, plausible tobacco demand equation from time series data for the UK whilst allowing for all of the various shocks and structural changes. A second objective of this study is to use the estimated demand function to evaluate tobacco policy in the UK, including the scope for using tax increases to achieve reduced consumption and increased revenues. It is found that smuggling has diminished the revenue yield of higher rates of duty, but total consumption of tobacco has been reduced. In addition to the introduction of further measures to control smuggling, policy may need to place more emphasis in the future on health campaigns and smoking restrictions.     

Fiscal Policy and Equitable Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general-equilibrium model with given exogenous fiscal policy, a nonmonotonic relation exists between the suboptimal long-run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two properties suggest that an alternative set of government policy instruments affects the response of private sector investment to fiscal policy. Moreover, the different properties of exogenous and endogenous fiscal policy theoretically account for the difference in the relation between economic growth and fiscal policy in empirical studies.     

The design of a consumption tax under capital risk

This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.