The Timing of Government Debt Reductions in the Presence of Inequality
TKFD Working Paper Series No.20-01
How will the timing of a consumption tax hike affect households? This paper uses the incomplete market model to assess the impact of a delay in a consumption tax hike. The results show that the welfare effect on households will differ according to one’s asset holdings: Poor households may prefer an earlier hike, since a delay will require an even larger increase at a later date, while rich people will prefer a later hike because this will result in bigger government debt, thereby exerting upward pressure on interest rates. The overall change in the social welfare will be determined by the endogenous distribution of assets.
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