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A dynamic theory of the excess burden of taxation

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  • Anastasios Karantounias

    (Federal Reserve Bank of Atlanta)

Abstract

This paper organizes, reinterprets and extends the dynamic theory of optimal fiscal policy with a representative agent, by highlighting the underlying principles that hide under each particular economic environment. I use a generalized version of recursive preferences in order to allow for richer asset pricing implications. I allow markets to be complete or incomplete and study a policymaker that acts under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier that makes precise the notion of ``tax-smoothing.'' Variants of a law of motion in terms of the inverse excess burden emerge in each environment. The basic policy prescription is simple and intuitive and revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today.

Suggested Citation

  • Anastasios Karantounias, 2019. "A dynamic theory of the excess burden of taxation," 2019 Meeting Papers 1356, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1356
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    References listed on IDEAS

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