Dynamic Fiscal Solvency with Consumption and Capital Taxes

Abstracts

EN

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.

Keywords

EN

dynamic modelling; capital tax; consumption tax; fiscal solvency

• Publisher: Uniwersytet Warszawski. Wydawnictwo Naukowe Wydziału Zarządzania
• Journal: Central European Economic Journal
• Year: 2018
• Volume: 5
• Issue: 52

Dates

published

2019-06-05

Contributors

other

Janusz Kudła

• Faculty of Economic Sciences, University of Warsaw Warsaw, Poland

• https://orcid.org/0000000324856877

other

Katarzyna Kopczewska

• Faculty of Economic Sciences, University of Warsaw Warsaw, Poland

• https://orcid.org/0000000310651790

other

Agata Kocia

• Faculty of Economic Sciences, University of Warsaw Warsaw, Poland

other

Robert Kruszewski

• Warsaw School of Economics Warsaw, Poland

other

Konrad Walczyk

• Warsaw School of Economics Warsaw, Poland

Identifiers

DOI

10.1515/ceej-2018-0013