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Dynamic Scoring: Alternative Financing Schemes

  • Eric M. Leeper

    ()

    (Indiana University)

  • Shu-Chun Susan Yang

    ()

    (Joint Committee on Taxation)

Neoclassical growth models predict that reductions in capital or labor tax rates are expansionary when lump-sum transfers are used to balance the government budget. This paper explores the consequences of bond-financed tax reductions that bring forth a range of possible offsetting policies, including future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can be contractionary. The paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2006/CAEPR2006-022.pdf
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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2006-022.

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Length: 26 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:inu:caeprp:2006022
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