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National Savings, Economic Welfare, and the Structure of Taxation

In: Behavioral Simulation Methods in Tax Policy Analysis

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  • Alan J. Auerbach
  • Laurence J. Kotlikoff

Abstract

This paper develops a perfect foresight general equilibrium simulation model of life cycle savings that may be used to investigate the potential impact of a wide range of government policies on national savings and economic welfare. The model can provide quantitative answers to a number of long-standing questions concerning the government's influence on capital formation. These include the degree of crowding out of private investment by debt financed increases in government expenditure, the differential effect on consumption of temporary versus more permanent tax cuts, the announcement effects of future changes in tax and expenditure policy, and the response to structural changes in the tax system, including both the choice of the tax base and the degree of progressivity. The model tracks the values of all economic variables along the transition path from the initial steady state growth path to the new steady state growth path. Hence, it can be used to compute the exact welfare gains or losses for each age cohort associated with tax reform proposals.
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Suggested Citation

  • Alan J. Auerbach & Laurence J. Kotlikoff, 1983. "National Savings, Economic Welfare, and the Structure of Taxation," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 459-498 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:7716
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    References listed on IDEAS

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    1. Alan J. Auerbach, 1979. "The Optimal Taxation of Heterogeneous Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 589-612.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. E. S. Phelps & J. G. Riley, 1978. "Rawlsian Growth: Dynamic Programming of Capital and Wealth for Intergeneration "Maximin" Justice," Review of Economic Studies, Oxford University Press, vol. 45(1), pages 103-120.
    4. Green, Jerry R. & Sheshinski, Eytan, 1979. "Approximating the efficiency gain of tax reforms," Journal of Public Economics, Elsevier, vol. 11(2), pages 179-195, March.
    5. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    6. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-926, Sept./Oct.
    7. Christophe Chamley, 1980. "Optimal Intertemporal Taxation and the Public Debt," Cowles Foundation Discussion Papers 554, Cowles Foundation for Research in Economics, Yale University.
    8. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-732, August.
    9. David Lipton & Jeffrey Sachs, 1980. "Accumulation and Growth in a Two-Country Model: A Simulation Approach," NBER Working Papers 0572, National Bureau of Economic Research, Inc.
    10. Laurence J. Kotlikoff, 1979. "Social Security and Equilibrium Capital Intensity," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 233-253.
    11. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Berthold U. Wigger, 2004. "On the Intergenerational Incidence of Wage and Consumption Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(1), pages 1-23, February.
    2. David G. Hartman, 1985. "On the Optimal Taxation of Capital Income in the Open Economy," NBER Working Papers 1550, National Bureau of Economic Research, Inc.
    3. Louis Kaplow, 2006. "Capital Levies and Transition to a Consumption Tax," NBER Working Papers 12259, National Bureau of Economic Research, Inc.
    4. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
    5. Roger H. Gordon & Soren Bo Nielsen, 1996. "Tax Avoidance and Value-Added vs. Income Taxation in an Open Economy," NBER Working Papers 5527, National Bureau of Economic Research, Inc.
    6. Alan S. Blinder, 1982. "Issues in the Coordination of Monetary and Fiscal Policy," NBER Working Papers 0982, National Bureau of Economic Research, Inc.
    7. repec:eee:dyncon:v:89:y:2018:i:c:p:93-99 is not listed on IDEAS
    8. Fischer Black, 1981. "When Is a Positive Income Tax Optimal?," NBER Working Papers 0631, National Bureau of Economic Research, Inc.
    9. R. Glenn Hubbard, 1984. "'Precautionary' Saving Revisited: Social Security, Individual Welfare, and the Capital Stock," NBER Working Papers 1430, National Bureau of Economic Research, Inc.
    10. David Bradford, "undated". "Consumption Taxes: Some Fundamental Transition Issues," EPRU Working Paper Series 95-15, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    11. Frenkel, Jacob A & Razin, Assaf, 1989. "International Effects of Tax Reforms," Economic Journal, Royal Economic Society, vol. 99(395), pages 38-58, Supplemen.
    12. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
    13. Don Fullerton & Yolanda K. Henderson & John B. Shoven, 1982. "A Comparison of Methodologies in Empirical General Equilibrium Models of Taxation," NBER Working Papers 0911, National Bureau of Economic Research, Inc.
    14. Auerbach, Alan J & Kotlikoff, Laurence J & Skinner, Jonathan, 1983. "The Efficiency Gains from Dynamic Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 81-100, February.
    15. Alan J. Auerbach & Laurence J. Kotlikoff, 1981. "An Examination of Empirical Tests of Social Security and Savings," NBER Working Papers 0730, National Bureau of Economic Research, Inc.
    16. Akira Okamoto, 2005. "Simulating fundamental tax reforms in an aging Japan," Economic Systems Research, Taylor & Francis Journals, vol. 17(2), pages 163-185.
    17. Fehr, Hans & Jokisch, Sabine & Kallweit, Manuel & Kindermann, Fabian & Kotlikoff, Laurence J., 2013. "Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, Elsevier.
    18. Lin, Shuanglin, 1999. "Tax reform and external balance," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 891-909, December.
    19. Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
    20. Pierre-Yves Letournel & Katheline Schubert & Philippe Trainar, 1992. "L'utilisation des modèles d'équilibre général calculables dans l'évaluation de la politique fiscale," Revue Économique, Programme National Persée, vol. 43(4), pages 709-724.
    21. Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier.
    22. Michael J. Boskin & Laurence J. Kotlikoff, 1985. "Pubic Debt and U.S. Saving: A New Test of the Neutrality Hypothesis," NBER Working Papers 1646, National Bureau of Economic Research, Inc.
    23. Alan J. Auerbach & Laurence J. Kotlikoff, 1984. "Simulating Alternative Social Security Responses to the Demographic Transition," NBER Working Papers 1308, National Bureau of Economic Research, Inc.

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