Fiscal forward guidance

Tax policy primarily aims to raise revenue to service public debt and finance government services and transfers. Tax policymakers often claim it can be used to pursue other goals like increased economic growth and desirable consumption behaviours. This paper explores how tax policy can be used to foster innovation and health outcomes, in search of a ‘fiscal forward guidance’. The focus is on tax policies that promote environmental sustainability through innovation or healthy consumption behaviour. Environmental regulation may harm firms’ competitiveness, incentivise strategic delocal- isation to localities with less stringent regulation, and foster innovation. Similarly, although regula- tions and restrictive tax policies on tobacco, alcohol, or sugar-sweetened beverages are intended to improve health outcomes, they may drive consumers to illegal or counterfeit products. This study reviews the theoretical underpinning of ‘good’ fiscal policy in these realms and present evidence of successful and unsuccessful fiscal policies to boost innovation and consumption.