Money, Neutrality of Consumption Taxes, and Growth in Intertemporal Optimizing Models

Abstract

This paper considers the effects of a proportional consumption tax with the same rate over time on the real growth path of a monetary economy. The analysis uses a variety of stylized monetary growth models in which the individual's consumption-saving decision is based on intertemporal utility maximization (e.g. the money-in-utility, transaction-costs, and cash-in-advance models). The neutrality of consumption taxation depends on the assumed role of money in the respective models, even though the tax revenue collected is fully rebated to consumers as lump-sum transfers. The consumption tax is generally superior to inflation tax (i.e. the rate of monetary growth) in terms of steady-state welfare, as long as the labour supply is fixed. JEL Classification Numbers: E21, E41, E62, H24