The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model

Abstract

This paper evaluates the long-run economic effects of a fiscal rebalancing reform, namely a policy consisting in increasing consumption taxes and simultaneously lowering payroll taxes, all this in a budget neutral way. To this end, we construct a heterogeneous-agent model and compare the pre- and post-reform steady states. The model is calibrated on French data to reproduce key characteristics of disposable income and net wealth distributions. We compare the outcomes of the reform under the benchmark model with those arising in its representative-agent version. Our results indicate that while the fiscal febalancing reform stimulates aggregate labor and capital, (i) it has a larger effect on capital in the heterogeneous-agent model than in its representative-agent counterpart; (ii) it also exacerbates wealth inequality, where wealthier households capture the whole macroeconomic increase in capital. The results are left unaffected by various perturbations around the baseline calibration. Taking into account the transition between the two stady states, a welfare analysis suggests that the reform entails a welfare cost even though a majority of agents would benefit from it.

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Reference

Christophe Cahn, Patrick Fève, and Julien Matheron, “The Long-Run Effects of Fiscal Rebalancing in a Heterogeneous-Agent Model”, TSE Working Paper, n. 24-1550, July 2024.