Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Optimal fiscal policy in a model with efficiency wages: the case of Bulgaria

Purpose: This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate. Design/methodology/approach: A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes a...

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Bibliographic Details
Published in:International journal of social economics 2023-02, Vol.ahead-of-print (2), p.195-209
Main Author: Vasilev, Aleksandar
Format: Article
Language:eng
Subjects:
Bulgaria
Case studies
Consumption
Efficiency wages
Equilibrium
Finance
Fiscal policy
Government spending
Households
Income taxes
Labor market
Peer review
Peers
Public finance
Public services
Ramsey policies
Tax rates
Tax revenues
Taxation
Unemployment
Use taxes
Wages & salaries
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Summary:Purpose: This paper aims to explore the effects of fiscal policy in an economy with efficiency wages, consumption taxes and a common income tax rate. Design/methodology/approach: A dynamic general-equilibrium model with the government sector is calibrated to Bulgarian data (1999–2018). Two regimes are compared and contrasted – the exogenous (observed) vs optimal policy (Ramsey) case. Findings: The main findings are as follows: (1) The optimal steady-state income tax rate is zero. (2) The benevolent Ramsey planner provides three times lower amount of the utility-enhancing public services. (3) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%. Originality/value: The focus of the paper is on the relative importance of consumption vs income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue. Peer review: The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-08-2021-0488 .
ISSN:0306-8293
1758-6712