Time-Consistent Fiscal Policy Under Heterogeneity: Conflicting or Common Interests
Athens University of Economics and Business - Department of International and European Economic Studies
James B. Malley
affiliation not provided to SSRN
Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex
May 17, 2011
CESifo Working Paper Series No. 3444
This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main findings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidise labour; (ii) a Pareto improving means to reduce inefficiently high capital taxation under discretion is for the government to place greater weight on the welfare of capitalists; (iii) capitalists and workers preferences, regarding the optimal amount of "capitalist bias", are not aligned implying a conflict of interests.
Number of Pages in PDF File: 28
Keywords: optimal fiscal policy, Markov-perfect equilibrium, heterogeneous agents
JEL Classification: E620, H210working papers series
Date posted: May 18, 2011
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