Optimal Fiscal Policy with Epstein–Zin Preferences and Utility-Enhancing Government Services: Lessons from Bulgaria (1999–2016)

Vasilev, Aleksandar (2021) Optimal Fiscal Policy with Epstein–Zin Preferences and Utility-Enhancing Government Services: Lessons from Bulgaria (1999–2016). Problems of Economic Transition, 62 (1-2). pp. 133-146. ISSN 1061-1991

Full content URL: https://doi.org/10.1080/10611991.2021.1902215

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Optimal Fiscal Policy with Epstein–Zin Preferences and Utility-Enhancing Government Services: Lessons from Bulgaria (1999–2016)
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Abstract

This article compares and contrasts exogenous (observed) and optimal fiscal policy in an economy with Epstein–Zin (1989, 1991) preferences, with consumption tax, and with a common income tax, using a dynamic general-equilibrium model, calibrated for Bulgarian data (1999–2016). The focus is on the relative importance of consumption versus income taxation, as well as on the provision of utility-enhancing public services. The main findings are: (i) The optimal steady-state income tax rate is zero. (ii) The benevolent Ramsey planner sets optimally the utility-enhancing public services, which are now 25% higher. (iii) The optimal steady-state consumption tax is approximately 50% higher.

Keywords:Epstein–Zin preferences; consumption tax; income tax; general equilibrium; optimal (Ramsey) fiscal policy; Bulgaria
Subjects:L Social studies > L130 Macroeconomics
Divisions:Lincoln International Business School
ID Code:46880
Deposited On:16 Nov 2021 12:22

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