<abstract xmlns="http://www.w3.org/1999/xhtml"><p>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.</p></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.

Dynamic Fiscal Solvency with Consumption and Capital Taxes

Central European Economic Journal

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Dynamic Fiscal Solvency with Consumption and Capital Taxes"}

To finance public expenditure a government needs to raise revenue, which mainly comes from taxes and borrowings. During a financial crisis, however, financing...

Dynamic Fiscal Solvency with Consumption and Capital Taxes

Published Online: Jun 05, 2019

Page range: 96 - 108

DOI: https://doi.org/10.1515/ceej-2018-0013

Keywords
dynamic modelling, capital tax, consumption tax, fiscal solvency

© 2018 J. Kudła, K. Kopczewska, A. Kocia, R. Kruszewski, K. Walczyk published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

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Dynamic Fiscal Solvency with Consumption and Capital Taxes

Published Online: Jun 05, 2019

Page range: 96 - 108

DOI: https://doi.org/10.1515/ceej-2018-0013

Keywordsdynamic modelling, capital tax, consumption tax, fiscal solvency

© 2018 J. Kudła, K. Kopczewska, A. Kocia, R. Kruszewski, K. Walczyk published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Fig. 1

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Keywords
dynamic modelling, capital tax, consumption tax, fiscal solvency