Pré-Publication, Document De Travail Année : 2011

Aggregate instability under balanced-budget consumption taxes: a re-examination

Résumé

We re-examine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, and assuming that preferences are of the Greenwood-Hercovitz-Huffman [8] (GHH) type, we show that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the tax rate is counter-cyclical. We also exhibit a Laffer curve, which explains the multiplicity of steady states when the tax rate is counter-cyclical. All these results are mainly driven by the absence of income effect. Finally, a numerical illustration shows that consumption taxation may be a source of instability for most OECD countries.

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halshs-00633609 , version 1 (19-10-2011)

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  • HAL Id : halshs-00633609 , version 1

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Carine Nourry, Thomas Seegmuller, Alain Venditti. Aggregate instability under balanced-budget consumption taxes: a re-examination. 2011. ⟨halshs-00633609⟩
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