TIME-CONSISTENT FISCAL POLICY UNDER HETEROGENEITY: CONFLICTING OR COMMON INTERESTS?
University of Glasgow
University of Glasgow and CESifo
Athens University of Economics & Business, CESifo
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 subsidize 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.
JEL Classification: E62, H21
Keywords: Optimal fiscal policy, Markov-perfect equilibrium, heterogeneous agents
Acknowledgements: We would like to thank Kevin Lansing for helpful comments and suggestions. We are grateful for financial support from the ESRC, Grant No. RES-062-23-2292, but the views expressed here are entirely our own.
Department of Economics,
University of Glasgow,
Adam Smith Building, Glasgow G12 8RT.