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The Excess Burden of Government Indecision

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  • Francisco J. Gomes
  • Laurence J. Kotlikoff
  • Luis M. Viceira

Abstract

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, life span, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, labor supply, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6% of the agent’s economic resources. This is a significant distortion in and of itself. It is also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Tax Policy and the Economy.

Volume (Year): 26 (2012)
Issue (Month): 1 ()
Pages: 125 - 164

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Handle: RePEc:ucp:tpolec:doi:10.1086/665505

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Cited by:
  1. Pástor, Luboš & Veronesi, Pietro, 2011. "Political Uncertainty and Risk Premia," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8601, C.E.P.R. Discussion Papers.
  2. Siciliani, Luigi, 2007. "Paying for Performance with Altruistic or Motivated Providers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6452, C.E.P.R. Discussion Papers.
  3. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 67(4), pages 1219-1264, 08.
  4. Laurence Kotlikoff & Ben Marx & Pietro Rizza, 2006. "Americans' Dependency on Social Security," Working Papers, University of Michigan, Michigan Retirement Research Center wp126, University of Michigan, Michigan Retirement Research Center.
  5. Alex Armstrong & Nick Draper & André Nibbelink & Ed Westerhout, 2007. "Fiscal prefunding in response to demographic uncertainty," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 85, CPB Netherlands Bureau for Economic Policy Analysis.

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