Macroeconomic and generational impacts of fiscal devaluation: an application for the Brazilian case

Abstract

Tax devaluation typically involves the reduction of social security contributions on the payroll with the increase of tax on consumption. This study evaluates the impact of fiscal devaluation in Brazil on consumption, capital, output and income distribution between generations. It uses a dynamic general equilibrium model with overlapping generations, finite life spans, risk of death and social security. The results suggest that the fiscal devaluation causes positive, yet modest, impact on product, capital and long-term consumption without major sacrifices for the economy in its transition path.