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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.

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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.
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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