Tax Rate Variability and Public Spending as Sources of Indeterminacy

• Published in: Journal of public economic theory Vol. 10; no. 3; pp. 399 - 421
• Main Authors: LLOYD-BRAGA, TERESA, MODESTO, LEONOR, SEEGMULLER, THOMAS
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01-06-2008; Association for Public Economic Theory; Blackwell Publishing Ltd; Wiley
• Series: Journal of Public Economic Theory
• Subjects: Consumption; Economic theory; Economics and Finance; Government spending; Humanities and Social Sciences; Studies; Tax rates; Taxation; Use taxes; public spending; Indeterminacy; taxation; segmented asset markets
• ISSN: 1097-3923; 1467-9779
• DOI: 10.1111/j.1467-9779.2008.00369.x

We consider a constant returns to scale, one sector economy with segmented asset markets of the Woodford type. We analyze the role of public spending, financed by labor income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We show that the degree of public spending externalities in preferences affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.