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The Welfare Cost of Uncertain Tax Policy

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  • Jonathan S. Skinner

Abstract

Frequent shifts in tax policy can increase uncertainty about future net-of-tax wages and interest income. This paper measures the impact of uncertain tax policy on savings, labor supply, and welfare in the United States. A vector autoregression model with six variables was estimated which found the standard error of the one-year-ahead forecast for the wage tax to be 1.8 percentage points, and for the interest income tax 3.3 percentage points. Furthermore, the negative correlation between unanticipated shifts in the real interest rate and changes in the interest income tax amplifies the variability in the real after-tax return. A two-period model of consumption and labor supply is developed that measures the effect of uncertain taxes on savings, work hours, and taxpayer welfare. Using plausible empirical parameters, it is shown that removing all uncertainty about future tax policy can lead to a welfare gain of 0.4 percent of national income, or about 12 billion dollars in 1985.

Suggested Citation

  • Jonathan S. Skinner, 1986. "The Welfare Cost of Uncertain Tax Policy," NBER Working Papers 1947, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1947
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    1. 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.
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    Cited by:

    1. Unal, Umut, 2015. "Capital Income Taxation and Welfare under DSGE Framework," MPRA Paper 68416, University Library of Munich, Germany.
    2. Gunther Tichy, 2015. "On transformations in financing structure in an affluent society," WWWforEurope Policy Paper series 20, WWWforEurope.
    3. Donald Bruce & William Fox & Matthew Murray, 2003. "To Tax Or Not To Tax? The Case Of Electronic Commerce," Contemporary Economic Policy, Western Economic Association International, vol. 21(1), pages 25-40, January.
    4. Rainer Niemann, 2007. "The Impact of Tax Uncertainty on Irreversible Investment," CESifo Working Paper Series 2075, CESifo Group Munich.
    5. Ortmann, Regina, 2015. "Uncertainty in weighting formulary apportionment factors and its impact on after-tax income of multinational groups," arqus Discussion Papers in Quantitative Tax Research 184, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Gunther Tichy, 2014. "On Transformations in Financing Structure in an Affluent Society," WIFO Working Papers 488, WIFO.
    7. Young Chun, 2001. "The Redistributive Effect of Risky Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 433-454, August.
    8. Rainer Niemann, 2001. "Tax Rate Uncertainty and Investment Behavior," CESifo Working Paper Series 557, CESifo Group Munich.
    9. Erzo F.P. Luttmer & Andrew A. Samwick, 2015. "The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security," NBER Working Papers 21818, National Bureau of Economic Research, Inc.

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