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, lifespan, 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, 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 percent of the agent's economic resources. This is a significant distortion in of itself. It's 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12859.
Length: Date of creation: Jan 2007 Date of revision: Handle: RePEc:nbr:nberwo:12859
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Find related papers by JEL classification: H2 - Public Economics - - Taxation, Subsidies, and Revenue H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions H6 - Public Economics - - National Budget, Deficit, and Debt
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Eugene F. Fama & Kenneth R. French, 2002.
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Eugene Fama & F. & Kenneth R. French, .
"The Equity Premium.","
CRSP working papers
522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002.
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