Figure 2 - uploaded by Eric M. Leeper
Content may be subject to copyright.
Capital Taxes: Alternative Financing Schemes. Responses to a permanent 1% capital tax rate reduction (in percent). The surprise tax cut occurs at period 0. Responses are plotted over a 100-year horizon when the economy has approximately reached its new steady state path. Government consumption adjusts: dotted-dashed line; labor tax rates adjust: solid line; lump-sum transfers adjust: dashed line.
Source publication
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...
Similar publications
The purpose of this paper is to develop an endogenous growth model with perfect competition and monopolistic competition on the basis of two main theories-neoclassical growth theory and new growth theory-in economics. Our model is based on three of most well-known models in economic theory: the Solow one-sector growth model, the Dixit-Stiglitz grow...
The rate of wealth accumulation is discussed, and an expression for a momentary rate of capital return is presented. An expected value of the wealth accumulation rate is produced. The return rates depend on any yield function. Three different yield functions are applied, two of them published in the literature, and a third one parametrized using a...
Citations
... More specifically, I develop a reasonably simple stochastic neoclassical growth model to carry out shocks and scenarios analysis. Similar models have been used by Mankiw and Weinzierl (2006), Leeper and Yang (2008), Davig,Leeper,and 3 It is a legal requirement for the CBO to produce projections under current policy settings. 4 The CBO is currently (March 2021) projecting gross government debt in the US to increase from 102 percent of GDP at the end of 2021 to 107 percent of GDP by 2031, and 202 percent of GDP by 2051 (see CBO, 2021). ...
... The model I build is plain vanilla in many respects. It shares a number of features with the textbook closed economy growth models of Leeper and Yang (2008), Leeper, Plante, and Traum (2010) and Trabandt and Uhlig (2011). New Zealand is a small open economy, so I extend the textbook closed economy model to the open economy taking the standard approach of Chari, Kehoe, and McGrattan (2002), Galì and Monacelli (2005), Galì and Monacelli (2008) and De Paoli (2009). ...
... The model I develop for use in this paper is plain vanilla in many ways. It shares a number of features with the textbook closed economy stochastic neoclassical growth models of Mankiw and Weinzierl (2006), Leeper and Yang (2008), Leeper, Plante, and Traum (2010) and Trabandt and Uhlig (2011). New Zealand is a small open economy so I extend the model to the open economy following the textbook approach of Chari, Kehoe, and McGrattan (2002), Galì and Monacelli (2005), Galì and Monacelli (2008) and De Paoli (2009). ...
... Mankiw and Weinzierl (2006) studies the extent to which a tax cut pays for itself through increased activity. Leeper and Yang (2008) emphasize the role of tax financing instruments when calculating the tax scoring. That literature is motivated by President Bush's early 2000s tax cuts in the United States. ...
We extend marginal excess burden (MEB) analysis in public finance literature to a dynamic general equilibrium model with incomplete markets and heterogeneous households. This extension allows us to quantitatively assess efficiency ranking and incidence of taxes. Our results indicate a disparity in welfare cost and distributional consequence of different forms of taxation on capital, labor and consumption. According to our MEB ranking, capital income taxation appears to be least efficient as it results in larger marginal excess burdens, compared to labor income tax and consumption tax. The tax incidence analysis shows variation of tax burdens across households, depending on their age, income type and generation. In particular, older households with higher income bear the highest burden of company income tax; meanwhile, future born households bear the highest burden of personal income tax. Hence, our MEB analysis demonstrates a fruitful approach to better understanding efficiency and incidence of tax reforms in one unified framework.
... 4 By doing so, we are able to precisely model actual tax reforms since EUROMOD contains all relevant rules of the taxbenefit systems in the EU Member States and allows for the simulation of direct taxes, social insurance contributions, and benefits according to actual legislation and hypothetical reform scenarios. This is usually not possible using aggregated macroeconomic models alone, which only differentiate between capital and labor taxes (see Leeper & Yang, 2008;Mankiw & Weinzierl, 2006;Strulik & Trimborn, 2012;Trabandt & Uhlig, 2011). ...
In this paper, we present the first dynamic scoring exercise linking a microsimulation and a dynamic general equilibrium model for Europe. We illustrate our novel methodology analyzing hypothetical reforms of the social insurance contributions system in Belgium. Our approach takes into account the feedback effects resulting from adjustments and behavioral responses in the labor market and the economy‐wide reaction to the tax policy changes essential for a comprehensive evaluation of the reforms. We find that the self‐financing effect of a reduction in employers’ social insurance contribution is substantially larger than that of a comparable reduction in employees’ social insurance contributions.
... 10 By doing so, we are able to precisely model actual tax reforms since EUROMOD contains all relevant rules of the tax-benefit systems in the EU Member States and allows for the simulation of direct taxes, social insurance contributions and benefits according to actual legislation and hypothetical reform scenarios. This is usually not possible using aggregated macroeconomic models alone, that only differentiate between capital and labor taxes (see Leeper & Yang, 2008;Mankiw & Weinzierl, 2006;Strulik & Trimborn, 2012;Trabandt & Uhlig, 2011). ...
... 10 By doing so, we are able to precisely model actual tax reforms since EUROMOD contains all relevant rules of the tax-benefit systems in the EU Member States and allows for the simulation of direct taxes, social insurance contributions and benefits according to actual legislation and hypothetical reform scenarios. This is usually not possible using aggregated macroeconomic models alone, that only differentiate between capital and labor taxes (see Leeper & Yang, 2008;Mankiw & Weinzierl, 2006;Strulik & Trimborn, 2012;Trabandt & Uhlig, 2011). ...
... Dalamagas (1998) shows support for the dynamic Laffer curve in a econometric framework of a multiple equation system. In neoclassical settings, since the dynamic scoring exercise of Mankiw and Weinzierl (2006) that examines the extent to which a tax cut is self-financing when incentive feedback effects are taken into account, Ferede (2008); Leeper and Yang (2008); Trabandt and Uhlig (2011); Chang and Peng (2012); Strulik and Trimborn (2012) extend their analyses in several dimensions. ...
This paper extends the Ireland (1994) model to incorporate population growth and examines a dynamic effect of a tax reduction on a long-run government budget We find evidence suggesting that the dynamic effect of a tax cut improves the government budget situation in the longrun. Our numerical analysis suggests that a population growth rate consistent with the U.S. economy has positive effects on a long-run government budget It is likely that low population growth leads to the deterioration of a long-run government budget. However, dynamic Laffer curves fail to arise incorporating a moderate initial debt level into the model. Furthermore, a public debt overhangs experiment casts doubt on the dynamic Laffer curves. (c) 2015 Elsevier Inc. All rights reserved.
... Contrarily, Mankiw and Weinzierl (2006) and Ferede (2008) used neoclassical growth models (and their variants) to investigate the budgetary costs of tax cuts by examining the degree to which they are self-financing. In the same vein, Leeper and Yang (2008) explored the effects of tax cuts on long-term government budgeting under alternative financing schemes. They found that more aggressive policies engender less debt accumulation and less costly tax cuts. ...
In this study, we investigate self-financing tax cuts, which are also known as dynamic Laffer effects. By proposing alternative definitions for dynamic Laffer effects, a policy option that features a tax cut should be chosen primarily on the basis of the relative magnitude of government transfers. The simple analytical condition under an alternative financing scheme that leaves current deficits unchanged reduces to a simple comparison between tax revenues and government transfers. Empirical examination of those conditions indicates that whereas countries in Northern and Western Europe, Australia, Canada, New Zealand, Korea, and Mexico show the most potential for experiencing dynamic Laffer effects, countries in Eastern Europe, France, the Netherlands and Portugal were not very susceptible.
... Building on the work of Baxter and King (1993), Galí, López-Salido, and Vallés (2007) and Leeper and Yang (2008) recent studies aimed at empirically characterizing the behavior of the fiscal policy sector. Forni, Monteforte, and Sessa (2009) characterize fiscal policy in a simple way by estimating feedback rules on debt following Bohn (1998). ...
We use a novel procedure to identify fiscal feedback rules for the US: We start by estimating a DSGE model and on that basis compute the Ramsey optimal responses to structural shocks. Then we let the policy maker choose from a general set of rules to match the dynamic behavior of a number of key variables like output, debt, and consumption, in the competitive equilibrium with their corresponding dynamic behavior in the Ramsey equilibrium. In the next step we estimate the model again but employ the contingency derived previously. The policy rules derived are general, not as complex as Ramsey and easily implementable.
... They argue that tax cuts can, through a new higher steady state level of capital and therefore a larger tax base, to a large extent pay for themselves (Mankiw and Weinzierl, 2006). Leeper and Yang (2007) show that such conclusions can only be drawn with speci…c assumptions regarding government spending. ...
There is a renewed interest in the dynamic effects of tax cuts on government revenue. The possibility of tax cuts paying for themselves over time definitely seems like an attractive option for policy makers. This paper looks at what conditions are required for reductions in capital taxes to be fully self-financing. This is done in a model with constant returns to scale in broad capital. Such a framework exhibits growth; the scope for self-financing tax cuts is therefore different than in the neoclassical growth model, most recently studied by Mankiw and Weinzierl (2006). Compared to previous literature, I make a methodological contribution in the definition of "Laffer effects" and clarify the role of compositional and dynamic effects in making tax cuts self-financing. I also provide simple analytical expressions for what tax rates are required for tax cuts to be fully self-financing. The results show that large distortions are required to get Laffer effects. Introducing a labor/leisure choice into the model opens up a new avenue for such effects, however.
... But, these papers do not deal with large change in tax rate and the feedback effect of corporate tax reduction. As for the feedback effect, there are several papers about dynamic scoring, which analyze the cost of the income tax reduction, such as Ireland (1994), Mankiw and Weinzierl (2006), Leeper and Yang (2008) and Trabandt and Uhlig (2011) ...
Recently, discussion of corporate tax reduction is hot political issue in Japan. Especially, some researchers and politicians insist on the reduction of corporate tax rate, following the fact of "Corporate tax paradox", which means that corporate tax revenue per Gross Domestic Product (GDP) has a negative correlation with effective corporate tax rate. However, quantitative effect of corporate tax reduction is unclear and the discussion of finance methods does not proceed. Therefore, we examine the quantitative effect of corporate tax reduction to employment, output and total tax revenue which is the cost of tax reduction. To analyze the effect of corporate tax reduction, we use Dynamic General Equilibrium (DGE) model and we use shooting algorithm to calculate the large corporate tax reduction (i.e. 5% or 20% corporate tax rate reduction). As a result, long-run effect of corporate tax reduction not only prompts to economic growth, but also increases total tax revenue, when financed by lump-sum transfer. Because current corporate tax rate is the right hand side of the Laffer curve. With respect to the magnitude of tax reduction, absolute impact of 20% reduction is much larger than that of 5%. But relative impact (i.e. multiplier effect of tax reduction) of 20% reduction is a little smaller than that of 5%. However, short-run effect is smaller than long-run one. In the short-run, since capital accumulation is insufficient, households decrease consumption and tax revenue.
