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Title: Public goods, congestion, and fiscal policy: Do consumption-based instruments matter?
Authors: Chatterjee, S
Ghosh, S
Keywords: Public Goods; Congestion; Consumption-based scale instruments; Growth; Welfare
Issue Date: 2009
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 09-07.
Abstract: We examine the impact of scal policy on macroeconomic performance when public goods play a dual role by simultaneously providing both productive and utility services to the private sector. When these services are subject to congesti on, a consumption tax is distortionary, generating a dynamic adjustment that contrasts an income tax. The design of optimal scal policy demonstrates the possibilities for using both income- and consumption-based scal instruments as opposed to relying on the income tax alone. In correcting for congestion, an income tax-consumption subsidy combination is the preferred policy when factor-substitutability in production is limited. On the other hand, an increase in the elasticity of substitution in production raises the eEcacy of a consumption tax as an alternative to the income tax. Not internalizing the dual beneCts of public goods might lead to misleading predictions regarding the eect of public policies on welfare.
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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