The Excess Burden of Government Indecision
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, 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.Download Info
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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
Note: AG AP HC PE POL
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- Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2012. "The Excess Burden of Government Indecision," NBER Chapters, in: Tax Policy and the Economy, Volume 26, pages 125-163 National Bureau of Economic Research, Inc.
- Laurence J. Kotlikoff & Francisco J. Gomes & Luis M. Viceira, 2010. "The Excess Burden of Government Indecision," Boston University - Department of Economics - Working Papers Series WP2010-014, Boston University - Department of Economics.
- Francisco Gomes & Laurence Kotlikoff & Luis Viceira, 2006. "The Excess Burden of Government Indecision," Working Papers wp123, University of Michigan, Michigan Retirement Research Center.
- Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2007. "The Excess Burden Of Government Indecision," Boston University - Department of Economics - Working Papers Series WP2007-004, Boston University - Department of Economics.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-10 (All new papers)
- NEP-PBE-2007-02-10 (Public Economics)
- NEP-PUB-2007-02-10 (Public Finance)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Pástor, Luboš & Veronesi, Pietro, 2010.
"Uncertainty about Government Policy and Stock Prices,"
CEPR Discussion Papers
7897, C.E.P.R. Discussion Papers.
- Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, 08.
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