Tax Rate Variability and Public Spending as Sources of Indeterminacy

40 Pages Posted: 10 Oct 2006

See all articles by Teresa Lloyd-Braga

Teresa Lloyd-Braga

Catolica Lisbon School of Business and Economics; Catolica Lisbon School of Business and Economics

Leonor Modesto

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics; IZA Institute of Labor Economics

Thomas Seegmuller

Aix-Marseille University - Aix-Marseille School of Economics

Date Written: August 2006

Abstract

We consider a constant returns to scale, one sector economy with segmented asset markets, encompassing both the Woodford (1986) and overlapping generations models. We analyze the role of public spending, financed by (labour or capital) income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.

Keywords: Indeterminacy, public spending, taxation, segmented asset markets

JEL Classification: E32, E63, H23

Suggested Citation

Lloyd-Braga, Teresa and Modesto, Leonor and Seegmuller, Thomas, Tax Rate Variability and Public Spending as Sources of Indeterminacy (August 2006). CEPR Discussion Paper No. 5796, Available at SSRN: https://ssrn.com/abstract=936405

Teresa Lloyd-Braga (Contact Author)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisboa, Lisboa 1649-023
Portugal
+351 21 721 4263 (Phone)
+351 21 727 0252 (Fax)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisboa, Lisboa 1649-023
Portugal

Leonor Modesto

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal
351217214242 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Thomas Seegmuller

Aix-Marseille University - Aix-Marseille School of Economics ( email )

Centre de la vieille Charité
2 rue de la Charité
13236 Marseille
France

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