This paper investigates the effects of a consumption tax on effective demand under stagnation. The existing work shows that a consumption tax does not influence effective demand in the case of a homogeneous household under stagnation. In this paper there are two types of household. One is the richer household, whose level of total assets is relatively high. The other is the poorer household, which owns fewer total assets. In a lump-sum transfer, when the ratio of the poorer household to the total population is large (small), imposing a consumption tax decreases (increases) effective demand. JEL Classification Numbers: E21, E41, H22.
In this study, we consider a scenario in which the government resorts to an income and inflation tax to finance its expenditures in the money-in-theproduction-function model. We show that a financing shift from the inflation tax to the income tax increases the real money holdings-to-capital ratio because the accumulation of capital is less favorable than holding money. We also find that a country's economic growth rate is maximized if all government expenditures are financed through an income tax. For welfare maximization, the government should set the income tax rate higher than the growth maximizing tax rate and reimburse the excess revenue using money contraction.
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