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| Optimal Tax Structure in a Dynamic Model with Multiple Levels of Government |
| CHENG Yudan, GONG Liutang
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School of Statistics and Mathematics, Central University of Finance and Economics;
Guanghua School of Management, Peking University |
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Abstract This paper studies the optimal tax structure of the central government and local governments in the framework of fiscal decentralization. We prove that in equilibrium the optimal taxation of local government is consumption tax. Then we use numerical simulations to compare the output and social welfare in equilibrium when the central government levies consumption tax and capital tax, and find that the optimal taxation of the central government is also consumption tax. At the meantime, the local government gives transfer payments to the central government. And there is a fixed proportional relationship between the central government’s consumption tax and the local government’s consumption tax.
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Received: 03 July 2014
Published: 12 April 2018
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