The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper investigates if there are circumstances where time-varying tax rates could improve welfare and whether such policy can effectively be implemented in practice. While, in principle, variable taxes could improve welfare in some cases, the paper highlights the very particular circumstances that need to prevail. With liquidity constraints, a consumption-tax break is in a better footing to boost consumption and welfare than an income-tax break. A hike in consumption taxes can also be used to restrain consumption and improve welfare under time-consistency problems induced by hyperbolic discounting. However, variable taxes are subject to serious implementation problems fettering their use.