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Consumption and Leisure ExternalitiesChueh, Chao-yu 08 August 2011 (has links)
Assume the model is a closed economy, and the shock is from technology progress. This research, based on a real business cycle model, explores the government¡¦s optimal taxation on consumption and labor income under the condition that representative agent¡¦s utility function has consumption externalities as well as leisure externalities. In the following, by changing the value (namely, by setting the consumption and leisure externalities parameter as either positive or negative), this research examines cyclical property of optimal taxation in terms of four situations occurred. The results indicate that, when labor income taxation in the economy is a constant, consumption externalities parameter is negative, leisure externalities parameter is positive, then the consumption taxation is countercyclical at this time; at other times the consumption taxation is procyclical. On the other hand, suppose consumption taxation is a constant, consumption externalities parameter is negative, leisure externalities parameter is positive, or both consumption and leisure externalities parameter are negative, then labor income taxation is countercyclical at this time; at other times the labor income taxation is procyclical.
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