Optimal fiscal policy in the neoclassical growth model revisited
Optimal fiscal policy in the neoclassical growth model revisited
This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government׳s ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.
Optimal taxation; Neoclassical growth model; Business cycle; Incomplete markets
1-17
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Mennuni, Alessandro
18a3b238-2d5b-4219-8d50-7c87765007a4
January 2015
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Mennuni, Alessandro
18a3b238-2d5b-4219-8d50-7c87765007a4
Gervais, Martin and Mennuni, Alessandro
(2015)
Optimal fiscal policy in the neoclassical growth model revisited.
European Economic Review, 73 (January), .
(doi:10.1016/j.euroecorev.2014.11.001).
Abstract
This paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period, thereby making the supply of capital elastic in the short run. Because taxing capital is distortionary in the short run, the government׳s ability/desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed. Our timing assumption also leads to a tractable Ramsey problem without state-contingent debt, which can give rise to debt-financed budget deficits during recessions.
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More information
Accepted/In Press date: 4 November 2014
e-pub ahead of print date: 17 November 2014
Published date: January 2015
Keywords:
Optimal taxation; Neoclassical growth model; Business cycle; Incomplete markets
Organisations:
Economics
Identifiers
Local EPrints ID: 410068
URI: http://eprints.soton.ac.uk/id/eprint/410068
ISSN: 0014-2921
PURE UUID: 9aabcac1-f205-43f7-bb7e-20f57605efcc
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Date deposited: 03 Jun 2017 04:01
Last modified: 15 Mar 2024 14:22
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Contributors
Author:
Martin Gervais
Author:
Alessandro Mennuni
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