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Tax Policy Design with Low Interest Rates

Author

Listed:
  • Alan J. Auerbach
  • William G. Gale

Abstract

Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes, (b) make wealth taxes less efficient relative to capital income taxes at given rates of tax, (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

Suggested Citation

  • Alan J. Auerbach & William G. Gale, 2022. "Tax Policy Design with Low Interest Rates," Tax Policy and the Economy, University of Chicago Press, vol. 36(1), pages 93-121.
    • Handle: RePEc:ucp:tpolec:doi:10.1086/718951
    DOI: 10.1086/718951
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    Cited by:

    1. LEONIDA, Ionel & CEPOI, Cosmin Octavian, 2022. "Challenges For Fiscal Policy After The Mitigation Of The Covid-19 Pandemic," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 10(1), pages 8-15, October.
    2. Asimakopoulos, Stylianos & Malley, James & Philippopoulos, Apostolis, 2025. "The firm-level and aggregate effects of corporate payout policy," Journal of International Money and Finance, Elsevier, vol. 157(C).

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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