Dynamic Fiscal Solvency with Consumption and Capital Taxes Cover Image

Dynamic Fiscal Solvency with Consumption and Capital Taxes
Dynamic Fiscal Solvency with Consumption and Capital Taxes

Author(s): Janusz Kudła, Katarzyna Kopczewska, Agata Kocia, Robert Kruszewski, Konrad Walczyk
Subject(s): Economic policy, Government/Political systems, Financial Markets, Public Finances, Fiscal Politics / Budgeting
Published by: Wydawnictwa Uniwersytetu Warszawskiego
Keywords: dynamic modelling; capital tax; consumption tax; fiscal solvency;

Summary/Abstract: To finance public expenditure a government needs to raise revenue, which mainly comes from taxes and borrowings. During a financial crisis, however, financing of budget deficit is particularly difficult because of a rise in debt servicing costs that crowd out other expenses and raise the concern for government solvency. In extreme cases, governments are constrained to tax, as borrowing opportunities are strictly limited or unavailable. Still, governments can choose from tax menu options (income and consumption taxes), given the flexibility of the tax mix. This article presents a long-term dynamic model of fiscal solvency that shows the equilibrium the revenue maximising government can obtain with reasonable tax rates when capital income can be shifted and there are constraints on the consumption tax. Specifically, the solution predicts a positive level of bonds in the long-term equilibrium and the tax rates dependent positively on the abundance of the tax bases.

  • Issue Year: 5/2018
  • Issue No: 52
  • Page Range: 96-108
  • Page Count: 13
  • Language: English