Preannounced optimal tax reform
Preannounced optimal tax reform
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.
tax reform, preannouncement, welfare effects, implementation lag
150-169
Klein, Paul
feea4bea-ca95-41ce-b72c-92b7d05247b1
Domeij, David
314246e8-14ed-46a9-97a9-0f5d024b542f
2005
Klein, Paul
feea4bea-ca95-41ce-b72c-92b7d05247b1
Domeij, David
314246e8-14ed-46a9-97a9-0f5d024b542f
Abstract
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.
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Published date: 2005
Keywords:
tax reform, preannouncement, welfare effects, implementation lag
Identifiers
Local EPrints ID: 188413
URI: http://eprints.soton.ac.uk/id/eprint/188413
ISSN: 1365-1005
PURE UUID: 23170405-b487-4652-b11a-f7818c2cbed4
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Date deposited: 03 Jun 2011 12:54
Last modified: 14 Mar 2024 03:31
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Author:
Paul Klein
Author:
David Domeij
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