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Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending

  • Mathias Trabandt

    ()

    (School of Business and Economics Humboldt University Berlin)

This paper analyzes optimal pre-announced capital and labor income tax reforms under valuable and productive government spending. Our baseline optimal reform reveals that these model ingredients result in a reduction of welfare losses that occur when the reform is announced before its implementation. Further, the mere existence of welfare losses from pre-announcement is due to the ability of the government to initially choose very high capital taxes and negative labor taxes. A government that instead chooses optimal long run taxes from the implementation date onwards generates sizable increases of welfare gains from pre-announcing the reform. We show that 4 years pre-announcement of this reform and the baseline optimal reform deliver similar levels of welfare gains. The underlying tax structure of both reforms, however, appears to be very different

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 668.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:668
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