Fiscal Policy Through Time-Varying Tax Rates: If and How

October 1, 2000

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper investigates if there are circumstances where time-varying tax rates could improve welfare and whether such policy can effectively be implemented in practice. While, in principle, variable taxes could improve welfare in some cases, the paper highlights the very particular circumstances that need to prevail. With liquidity constraints, a consumption-tax break is in a better footing to boost consumption and welfare than an income-tax break. A hike in consumption taxes can also be used to restrain consumption and improve welfare under time-consistency problems induced by hyperbolic discounting. However, variable taxes are subject to serious implementation problems fettering their use.

Subject: Consumption, Consumption taxes, Credit, Income tax systems, Labor, Labor supply, Money, National accounts, Taxes

Keywords: allocation of consumption, constraint multiplier, Consumption, consumption path, Consumption taxes, Counter-cyclical fiscal policy, Credit, credit constraint, hyperbolic discounting, Labor supply, liquidity constraint, tax rate, taxation, WP

Pages:
25
Volume:
2000
DOI:
https://doi.org/10.5089/9781451858419.001
Issue:
170
Series:
Working Paper No. 2000/170
Stock No:
WPIEA1702000
ISBN:
9781451858419
ISSN:
1018-5941

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