Do tax distortions lead to more indeterminacy? A New Keynesian perspective

Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, and tax distortions

Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective

We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule-of-thumb (liquidity constrained) consumers and capital accumulation by focusing on the inter-action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms� monopoly rents reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.Rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, tax distortions, balanced government budget.

From IRAP to CBIT: tax distortions and redistributive effects

The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasizedbusiness cycles, tax distortions, micro-simulations models, distributive effects, Italy.

Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness

This paper extends the stabilization game between monetary and fiscal authorities to the case of multiplicative (model) uncertainty. In this context, the “symbiosis assumption”, i.e. fiscal and monetary policy share the same ideal targets, no longer guarantees the achievement of ideal output and inflation, unless the ideal output is equal to its natural level. A time consistency problem arises.Monetary-fiscal policy interactions, uncertainty, symbiosis.

Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness

This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers� output target is equal to the natural level.Monetary-fiscal policy interactions, uncertainty, symbiosis.

Investigating the Incidence of Value Added Tax on Households Income: New Evidence from Italy

This paper analyses the incidence of the Value Added Tax (VAT) on Italian households income. To address this question, we developed a non-behavioural microsimulation model, the Value Added Tax Simulation Model (VATSIM-DF II). The goals of VATSIM-DF (II) are to estimate actual and expected VAT revenues, assess the VAT incidence on households disposable income, and simulate the distributional effects of changes in fiscal policies in Italy. Compared to existing models, the main achievements of this study are: (i) the creation of a unique original dataset, which includes tax register data; (ii) the implementation of a matching procedure, based on Tax Register data, which outperforms other data fusion strategies used in the existing literature. These innovations allow us to create a reliable and unique dataset to simulate changes in VAT and to produce results consistent with the most updated macroeconomic data. We tested our model, at current VAT legislation, and we show the VAT burden on Italian households confirming the regressivity of VAT. Finally, we analyse the effect of a revenue neutral reform, with two VAT rates, which applies the reduced VAT rate also to female and babies sanitary products

Do tax distortions lead to more indeterminacy? A New Keynesian perspective

Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule

From IRAP to CBIT: tax distortions and redistributive effects

The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasize