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A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes

Author

Listed:
  • Mansoorian Arman

    (Department of Economics, York University, Toronto, M3J 1P3, Canada)

  • Michelis Leo
  • Angyridis Constantine

    (Department of Economics, Ryerson University, Toronto, M5B 2K3, Canada)

Abstract

In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.

Suggested Citation

  • Mansoorian Arman & Michelis Leo & Angyridis Constantine, 2023. "A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 1-25, January.
    • Handle: RePEc:bpj:bejmac:v:23:y:2023:i:1:p:1-25:n:6
    DOI: 10.1515/bejm-2021-0024
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    More about this item

    Keywords

    welfare measure; compensating variation; dynamic general equilibrium; labor income taxes;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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