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Preannounced optimal tax reform

Record type: Article

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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Citation

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

More information

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

Catalogue record

Date deposited: 03 Jun 2011 12:54
Last modified: 18 Jul 2017 11:42

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Contributors

Author: Paul Klein
Author: David Domeij

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