Home IGIER  




Tax Cuts, Redistribution, and Borrowing Constraints
By Tommaso Monacelli and Roberto Perotti

With perfect credit markets, any (lump-sum) tax redistribution is neutral. We study the e¤ects of a tax redistribution in an economy with heterogenous agents and borrowing constraints. Under flexible prices, a tax redistribution that favors "the poor" (i.e., the credit constrained) is neutral, or, possibly, even mildly contractionary. When nominal prices are sticky, that result is overturned: a tax redistribution from the savers to the constrained borrowers is expansionary on output. Key to the non-neutrality result is the agents' heterogenous sensitivity to movements in the credit premium.

JEL Classification Numbers: E62, H20, H60.

•  Download PDF Paper

Last updated July 26, 2011