Fiscal Policy Through Time-Varying Tax Rates: If and How

IMF Working Papers, October 1, 2000

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Fiscal Policy Through Time-Varying Tax Rates: If and How

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Bibliographic details

• Authors: Martin D Kaufman
• Published: October 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451858419.001

Summary and central findings

• The paper investigates if there are circumstances where time-varying tax rates could improve welfare and whether such policy can effectively be implemented in practice.
• In principle, variable taxes could improve welfare in some cases, but very particular circumstances need to prevail for gains to materialize.
• With liquidity constraints, a consumption-tax break is in a better footing to boost consumption and welfare than an income-tax break.
• A hike in consumption taxes can be used to restrain consumption and improve welfare under time-consistency problems induced by hyperbolic discounting.
• Variable taxes face serious implementation problems that fetter their practical use.

Analysis and mechanisms examined

• Liquidity constraints versus tax instrument choice:
  • Consumption-tax break vs. income-tax break: consumption-tax breaks are more effective at boosting consumption and welfare when liquidity constraints bind.
• Time-consistency and discounting:
  • Hyperbolic discounting generates time-consistency problems; increasing consumption taxes can restrain consumption and improve welfare in these contexts.
• General assessment:
  • While theoretical welfare improvements exist under specific conditions, practical implementation issues limit the applicability of time-varying tax policies.

Policy implications and recommendations

• Consider consumption-tax tools when addressing liquidity-constrained households to more effectively boost consumption and welfare.
• Use increases in consumption taxes as a potential commitment device to restrain overconsumption where hyperbolic discounting and time-inconsistency are relevant.
• Recognize and address the "serious implementation problems" associated with variable taxes before adopting time-varying tax strategies in policy design.

Content in this bundle

• Fiscal Policy Through Time-Varying Tax Rates: If and How - WP/00/170
  • Fiscal Policy Through Time-Varying Tax Rates: If and How - WP/00/170 (Markdown version)
  • Fiscal Policy Through Time-Varying Tax Rates: If and How - WP/00/170 (PDF)