Without loss of generality, we assume that government expenditure [G.sub.t] is funded by non-distortionary, lump-sum taxes
[T.sub.t] = [G.sub.t], t = 0,1.
In the absence of an ability to use lump-sum taxes
, the optimal commodity tax structure is provided by Ramsey (1927).
A critical feature of the planning problem we study is whether the planner can redistribute resources by means of lump-sum taxes
Previous work [Ellis and Auernheimer, 1996, "Stabilization under Capital Controls," Journal of International Money and Finance 15(4), 523-33] showed the private sector smoothes consumption prior to an anticipated fiscal reform consisting of an increase in lump-sum taxes
under a fixed exchange rate and no capital mobility.
The cost of the imported good (i.e., [P.sub.g]g), used for public pollution abatement, is financed through the emission tax revenue [i.e., -t[R.sub.t](t, K)] and lump-sum taxes
(2) When the private insurance market suffers from an adverse selection problem, the government may deal with the market failure by providing a simple lump-sum taxes
and subsidies system (Crocker and Snow, 1985) or a linear premium subsidy (Selden, 1999).
Neoclassical growth models predict positive growth effects throughout the entire transition path after a reduction in capital or labor tax rates when lump-sum taxes
or transfers are used to balance the government budget.
Such a policy is feasible since the ratio of lump-sum taxes
(or transfers, if T is negative) to output can be readily shown to be less than one in absolute value.
Likewise, in contrast to the monetary policy literature with lump-sum taxes
, the authors find that, in their model, a government spending shock creating fiscal stress affects the optimal path of inflation and the output gap.
These results are derived under the assumption that the government can employ lump-sum taxes
to balance its budget.
If our model is expanded to include lump-sum taxes
, increases in G financed by lump-sum taxes
borne only by the donor will completely crowd out donations.
A well-known conclusion in the theory of international trade is that having tariffs is not an optimal policy for a small country unable to influence terms of trade if collection costs of taxes can be disregarded and lump-sum taxes
or indirect taxes on all commodities are possible.