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|Title:||Public goods, congestion, and fiscal policy: Do consumption-based instruments matter?|
|Keywords:||Public Goods; Congestion; Consumption-based scale instruments; Growth; Welfare|
|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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