Dynamic effects of consumption tax reforms with durable consumption
Dynamic effects of consumption tax reforms with durable consumption
This paper introduces durables into a dynamic general equilibrium overlapping generation model with idiosyncratic income shocks and endogenous borrowing constraints, which depend on durables. The aim of this paper is to evaluate the welfare effects of consumption tax reforms in a richer model that captures the difference between nondurable and durable consumption. When durables are considered, the standard results that a shift to consumption taxes is welfare improving are overturned. The mechanism of this opposing result is that consumption tax makes durable consumption more expensive without relaxing the borrowing constraint. The inability of borrowing to insure against income risk deviates the economy further away from market completeness and particularly hurts young and poor households. As a result, welfare decreases, coupled with negative redistribution.
1
Li, Qian
e8950786-8f13-45ac-9a4d-8942268fe32c
28 February 2020
Li, Qian
e8950786-8f13-45ac-9a4d-8942268fe32c
Li, Qian
(2020)
Dynamic effects of consumption tax reforms with durable consumption.
The B.E. Journal of Macroeconomics, 20 (2), .
(doi:10.1515/bejm-2019-0026).
Abstract
This paper introduces durables into a dynamic general equilibrium overlapping generation model with idiosyncratic income shocks and endogenous borrowing constraints, which depend on durables. The aim of this paper is to evaluate the welfare effects of consumption tax reforms in a richer model that captures the difference between nondurable and durable consumption. When durables are considered, the standard results that a shift to consumption taxes is welfare improving are overturned. The mechanism of this opposing result is that consumption tax makes durable consumption more expensive without relaxing the borrowing constraint. The inability of borrowing to insure against income risk deviates the economy further away from market completeness and particularly hurts young and poor households. As a result, welfare decreases, coupled with negative redistribution.
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Accepted/In Press date: 22 February 2017
Published date: 28 February 2020
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Local EPrints ID: 470505
URI: http://eprints.soton.ac.uk/id/eprint/470505
ISSN: 1555-0486
PURE UUID: 85474b4e-8238-4170-938a-290e7ef6bdb7
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Date deposited: 12 Oct 2022 16:31
Last modified: 16 Mar 2024 22:11
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