We reexamine the destabilizing role of balanced-budget fiscal policy rules based on consumption taxation. Using a one-sector model with infinitely-lived households, and assuming that preferences are of the Greenwood-Hercovitz-Huffman [8] (GHH) type, we show that non-linear consumption taxation may destabilize the economy, promoting expectation-driven fluctuations, if the tax rate is countercyclical. We also exhibit a Laffer curve, which explains the multiplicity of steady states when the tax rate is counter-cyclical. All these results are mainly driven by the absence of income effect. Finally, a numerical illustration shows that consumption taxation may be a source of instability for most OECD countries.

This article analyzes the consequences on capital accumulation and environmental quality of environmental policies …nanced by public debt. A public sector of pollution abatement is …nanced by a tax and/or public debt. We show that if the initial capital stock is high enough, the economy monotonically converges to a long-run steady state. On the contrary, when the initial capital stock is low, the economy is relegated to an environmental-poverty trap. We also explore the implications of public policies on the trap and on the long-run stable steady state. In particular, we …nd that government should decrease debt and increase pollution abatement to promote capital accumulation and environmental quality at the stable long-run steady state.JEL classi…cation: H23, H63, Q56.