Preannounced optimal tax reform

Klein, Paul and Domeij, David (2005) Preannounced optimal tax reform. Macroeconomic Dynamics, 9, (2), 150-169. (doi:10.1017/S1365100505040204).


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In constitutional democracies, laws take time to be deliberated upon, to be passed, and to be implemented. Motivated by this observation, we study the properties of optimal tax reform when it has to be announced in advance of its implementation. We find that a delay between announcement and implementation has large effects on the optimal fiscal policy during the transition to the new steady state. On the other hand, we find that the welfare gains from optimal tax reform are fairly robust to the introduction of an implementation lag. Increasing the lag from zero to four years reduces the welfare gains by less than a quarter. Moreover, it turns out that this reduction of the welfare gain is mainly due to the delay itself rather than the effect of preannouncement on the character of the optimal tax reform.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1017/S1365100505040204
ISSNs: 1365-1005 (print)
1469-8056 (electronic)
Keywords: tax reform, preannouncement, welfare effects, implementation lag
Subjects: H Social Sciences > HB Economic Theory
J Political Science > JA Political science (General)
Divisions : University Structure - Pre August 2011 > School of Social Sciences
ePrint ID: 188413
Accepted Date and Publication Date:
Date Deposited: 03 Jun 2011 12:54
Last Modified: 31 Mar 2016 13:39

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