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Consumption tax cuts vs stimulus payments

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  • Bartal, Mehdi
  • Becard, Yvan

Abstract

Recent work shows that in macroeconomic models with non-Ricardian consumer behavior, uniform transfers are equivalent to interest rate cuts. That is, policymakers can use stimulus payments to substitute for conventional monetary policy when, say, the zero lower bound on short-term rates binds. We argue that in the same class of models, temporarily reducing consumption taxes delivers more stimulus than transfers — at the same cost to the taxpayer. Consumption tax cuts activate both income and substitution channels and prompt a strong response from all consumers across the wealth distribution. Simulating these policies in a quantitative heterogeneous agent New Keynesian model, we find output expands twice as much.

Suggested Citation

  • Bartal, Mehdi & Becard, Yvan, 2024. "Consumption tax cuts vs stimulus payments," Journal of Public Economics, Elsevier, vol. 239(C).
  • Handle: RePEc:eee:pubeco:v:239:y:2024:i:c:s0047272724001634
    DOI: 10.1016/j.jpubeco.2024.105227
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    More about this item

    Keywords

    Fiscal stabilization policy; Consumption taxes; Transfers; HANK;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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