Expenditure Composition and Distortionary Tax for Equitable Economic Growth
IMF Working Papers, June 1, 2006
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- Expenditure Composition and Distortionary Tax for Equitable Economic Growth
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Bibliographic details
- Authors: Hyun Park
- Published: June 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864250.001
Summary findings
- The paper studies optimal fiscal policy in a growing economy where the government simultaneously provides three expenditure categories financed by distortionary taxes: public production services, public consumption services, and state-contingent redistributive transfers.
- In a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal longrun growth rate in a competitive economy and distortionary tax rates.
- When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative.
- The interaction between fiscal policy and growth cannot be captured adequately by a simple linear model using an aggregate measure of fiscal policy.
Model mechanisms and sources of nonlinearity
- Expectation and coordination of fiscal policy.
- Impulse response of government policies.
- Presence of positive externality due to government spending.
Policy implications and interpretation
- Fiscal policy design must account for nonlinear effects of distortionary taxation on long-run growth.
- Aggregate measures of fiscal stance may misrepresent the complex interaction between expenditure composition and growth.
- Optimal policy analysis should consider endogenous choice of fiscal instruments and the differentiated roles of public production services, public consumption services, and state-contingent redistributive transfers.