A Note on Built-in Flexibility of Taxation and Stability when Tax Liabilities respond with a Time Lag*

Precis: Given tax rates, tax revenues rise as income rises. This p roper ty o f a tax system is k n o w n as " b u i l t i n flexibility o f taxa t ion" and i t is w i d e l y regarded as a stabilising force. The present paper analyses a mode l i n w h i c h tax liabilities are a lagged funct ion o f income and con­ sumption adjusts to disposable income either w i t h or w i t h o u t t ime lags. I t is shown that i n such a system b u i l t i n flexibility o f taxation is de-stabilising rather than stabilising, that short ( t w o period) oscillations m a y be induced and that the magnitude o f an economy's fluctuations may be increased.