IDEAS home Printed from
MyIDEAS: Login to save this book chapter or follow this series

Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy: The Diamond–Zodrow Model

  • Zodrow, George R.
  • Diamond, John W.

We examine the use of dynamic overlapping generations (OLG) computable general equilibrium (CGE) models to analyze the economic effects of tax reforms, using as a paradigm our Diamond–Zodrow (DZ) model. Such models are especially well-suited to analyzing both the short-run transitional and the long-run dynamic macroeconomic effects of tax reforms, including the time paths of reform-induced changes in labor supply, saving, and investment, as well as the redistributional effects of reforms across and within generations. We begin with a brief overview of the use of OLG-CGE models in the analysis of tax reform, focusing on the seminal contribution of Auerbach and Kotlikoff (1987). We then consider a variety of extensions of this work, including the multiple-good, multiple-individual model constructed by Fullerton and Rogers (1993), as well as the addition of open economy factors, human capital accumulation and uncertainty. Many of the applications of these models have focused on changes in capital income taxation or, more generally, the replacement of an income tax system that fully taxes capital income with a consumption-based tax system that exempts normal returns to capital, and we focus on such reforms. We describe in considerable detail the DZ model, which is characterized by 55 cohorts, 12 income groups within each cohort, four production sectors and explicit calculation of reform-induced changes in asset values. We conclude by describing numerous applications of the DZ model, ranging from incremental reforms of the income tax system including deficit-financed tax cuts to ‘fundamental tax reforms’ that involve replacing the income tax with a consumption-based tax system, to the implementation of a value-added tax imposed in addition to the income tax as a means of reducing current deficits and the national debt in the US.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

in new window

This chapter was published in:
  • Peter B. Dixon & Dale Jorgenson (ed.), 2012. "Handbook of Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, Elsevier, edition 1, volume 1, number 1, 05.
  • This item is provided by Elsevier in its series Handbook of Computable General Equilibrium Modeling with number v:1:y:2013:i:c:p:743-813.
    Handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:743-813
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
    2. Matthew D. Shapiro & Christopher L. House, 2006. "Phased-In Tax Cuts and Economic Activity," American Economic Review, American Economic Association, vol. 96(5), pages 1835-1849, December.
    3. George R. Zodrow, 2007. "Should Capital Income be Subject to Consumption-Based Taxation?," Working Papers 0715, Oxford University Centre for Business Taxation.
    4. Eric J. Bartelsman & Roel Beetsma, 2000. "Why pay more? Corporate Tax Avoidance through Transfer Pricing in OECD Countries," Tinbergen Institute Discussion Papers 00-054/2, Tinbergen Institute.
    5. Zodrow, George R., 2010. "Capital Mobility And Capital Tax Competition," National Tax Journal, National Tax Association, vol. 63(4), pages 865-901, December.
    6. Bayoumi, Tamim & Laxton, Doug & Pesenti, Paolo, 2004. "Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment," CEPR Discussion Papers 4481, C.E.P.R. Discussion Papers.
    7. Alan J. Auerbach, 2002. "The Bush Tax Cut and National Saving," NBER Working Papers 9012, National Bureau of Economic Research, Inc.
    8. Wojciech Kopczuk & Joseph P. Lupton, 2007. "To Leave or Not to Leave: The Distribution of Bequest Motives," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 207-235.
    9. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc.
    10. Leon Bettendorf & Michael P. Devereux & Albert van der Horst & Simon Loretz & Ruud A. de Mooij, 2010. "Corporate tax harmonization in the EU," Economic Policy, CEPR;CES;MSH, vol. 25, pages 537-590, 07.
    11. Alan J. Auerbach, 2005. "Dynamic Scoring: An Introduction to the Issues," American Economic Review, American Economic Association, vol. 95(2), pages 421-425, May.
    12. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
    13. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
    14. Driffill, E John & Rosen, Harvey S, 1983. "Taxation and Excess Burden: A Life Cycle Perspective," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 671-83, October.
    15. Burman, Leonard E. & Rohaly, Jeffrey & Rosenberg, Joseph & Lim, Katherine C., 2010. "Catastrophic Budget Failure," National Tax Journal, National Tax Association, vol. 63(3), pages 561-83, September.
    16. Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1981. "The Efficiency Gains from Dynamic Tax Reform," NBER Working Papers 0819, National Bureau of Economic Research, Inc.
    17. Mankiw, N. Gregory & Weinzierl, Matthew, 2006. "Dynamic scoring: A back-of-the-envelope guide," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1415-1433, September.
    18. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    19. James Davies & John Whalley, 1991. "Taxes and Capital Formation: How Important is Human Capital?," NBER Chapters, in: National Saving and Economic Performance, pages 163-200 National Bureau of Economic Research, Inc.
    20. Evans, Owen J, 1983. "Tax Policy, the Interest Elasticity of Saving, and Capital Accumulation: Numerical Analysis of Theoretical Models," American Economic Review, American Economic Association, vol. 73(3), pages 398-410, June.
    21. Laurence J. Kotlikoff, 1998. "The A-K Model: It's Past, Present, and Future," NBER Working Papers 6684, National Bureau of Economic Research, Inc.
    22. Bruce, Donald & Holtz-Eakin, Douglas, 1999. "Fundamental Tax Reform and Residential Housing," Journal of Housing Economics, Elsevier, vol. 8(4), pages 249-271, December.
    23. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    24. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    25. Gaetan Nicodeme, 2009. "Corporate Income Tax and Economic Distortions," Taxation Papers 15, Directorate General Taxation and Customs Union, European Commission.
    26. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
    27. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
    28. Lawrence H. Goulder & John B. Shoven & John Whalley, 1983. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium Tax Analysis Model," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 333-368 National Bureau of Economic Research, Inc.
    29. William C. Randolph, 2006. "International Burdens of the Corporate Income Tax: Working Paper 2006-09," Working Papers 18067, Congressional Budget Office.
    30. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    31. McLure, Charles E, Jr & Zodrow, George R, 1987. "Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 37-58, Summer.
    32. Gravelle Jane G & Smetters Kent A., 2006. "Does the Open Economy Assumption Really Mean That Labor Bears the Burden of a Capital Income Tax?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-44, August.
    33. John Diamond, 2005. "Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts," International Tax and Public Finance, Springer, vol. 12(2), pages 165-192, March.
    34. Rosanne Altshuler & Nicholas Bull & John Diamond & Timothy Dowd & Pamela Moomau, 2006. "The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap Between Theory and Practice," Departmental Working Papers 200622, Rutgers University, Department of Economics.
    35. Taber Christopher, 2002. "Tax Reform and Human Capital Accumulation: Evidence from an Empirical General Equilibrium Model of Skill Formation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-38, October.
    36. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "A General Equilibrium Model for Tax Policy Evaluation," NBER Books, National Bureau of Economic Research, Inc, number ball85-1, December.
    37. Leiderman,Leonardo & Razin,Assaf (ed.), 2010. "Capital Mobility," Cambridge Books, Cambridge University Press, number 9780521142731, October.
    38. Sabine Jokisch & Laurence J. Kotlikoff, 2007. "Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax1," Boston University - Department of Economics - Working Papers Series WP2007-026, Boston University - Department of Economics.
    39. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, June.
    40. Feldstein, Martin S, 1974. "Incidence of a Capital Income Tax in a Growing Economy with Variable Savings Rates," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 505-13, October.
    41. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Introduction to "A General Equilibrium Model for Tax Policy Evaluation"," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 1-5 National Bureau of Economic Research, Inc.
    42. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
    43. Jokisch, Sabine & Kotlikoff, Laurence J., 2007. "Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax," National Tax Journal, National Tax Association, vol. 60(2), pages 225-52, June.
    44. John W. Diamond & George R. Zodrow, 2007. "Economic Effects of a Personal Capital-Income Tax Add-On to a Flat Tax," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(3), pages 374-395, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:hacchp:v:1:y:2013:i:c:p:743-813. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.