Skip to main content
×
Home
    • Aa
    • Aa

PREANNOUNCED OPTIMAL TAX REFORM

  • DAVID DOMEIJ (a1) and PAUL KLEIN (a2)
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.

Copyright
Corresponding author
Address correspondence to: David Domeij, Department of Economics, Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden, e-mail: david.domeij@hhs.se
Address correspondence to: Paul Klein, Department of Economics, University of Western Ontario, London, Ontario, Canada N6A 5C2, e-mail: paul.klein@uwo.ca.
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

CareyD. & H.Tchilinguirian2000Average Effective Tax Rates on Capital, Labour and Consumption. OECD working paper 258.

ChamleyC.1986Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica54, 607622.

ChariV.V., L.J.Christiano, & P.J.Kehoe1994Optimal fiscal policy in a business cycle model. Journal of Political Economy102, 617652.

GordonR., L.Kalambokids, & J.Slemrod, 2003Do We Now Collect Any Revenue from Taxing Capital Income? NBER working paper 9477.

JonesL., R.Manuelli, & P.Rossi1993Optimal taxation in models of endogenous growth. Journal of Political Economy101, 485517.

JonesL.E., R.E.Manuelli, & P.E.Rossi1997On the optimal taxation of captial income. Journal of Economic Theory73, 93117.

JuddK.L.1985Redistributive taxation in a simple perfect foresight model. Journal of Public Economics28(1), 5983.

LucasR.E.1990Supply side economics: An analytical review. Oxford Economic Papers42, 293316.

LucasR.E.J. & N.L.Stokey1983Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics12, 5593.

RamseyF.P.1927A contribution to the theory of taxation. Economic Journal37(145), 4761.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords: