Time-consistent scal policy under heterogeneity: Conicting or common interests?

This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main …ndings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidise labour; (ii) a Pareto improving means to reduce ine¢ ciently high capital taxation under discretion is for the government to place greater weight on the welfare of capitalists; (iii) capitalists and workers preferences, regarding the optimal amount of "capitalist bias", are not aligned implying a con‡ict of interests. Keywords: Optimal …scal policy, Markov-perfect equilibrium, heterogeneous agents JEL Classi…cation: E62, H21 We would like to thank Kevin Lansing for helpful comments and suggestions. We are grateful for …nancial support from the ESRC, Grant No. RES-062-23-2292, but the views expressed here are entirely our own. Address for correspondence: Jim Malley, Department of Economics, University of Glasgow, Adam Smith Building, Glasgow G12 8RT. E-mail [email protected].