Working Paper: NBER ID: w0729
Authors: 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.
Keywords: national savings; economic welfare; tax structure; government expenditure
JEL Codes: H21; H24; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government expenditure financed by debt (H69) | crowding out of private investment (E62) |
| structure of taxation (H20) | national savings (D14) |
| temporary tax cuts (H29) | national savings (D14) |
| permanent tax cuts (H29) | national savings (D14) |
| early announcements of future tax policy changes (H26) | national savings rate (D14) |