Working Paper: NBER ID: w1027
Authors: Alan J. Auerbach; Laurence J. Kotlikoff
Abstract: This paper examines the closed economy effects of government policies that vary with respect to whether they treat newly produced capital differently from old capital. Policies that do make this distinction are denoted investment policies, while those that do not are labelled savings policies. While both types of policies alter marginal incentives to accumulate new capital, investment incentives can generate significant inframarginal redistribution from current holders of wealth to those with small or zero claims on the existing capital stock. Among the principal findings, based on simulations of a general equilibrium, perfect foresight, overlapping generations life-cycle model, are:1)Investment incentives, even if financed by short run increases in the stock of debt, significantly increase capital formation.2)Deficit-financed savings incentives, in contrast, typically reduce the economy's long run capital stock.3)Deficit-financed investment incentives can actually be self-financing,in that they may lead to a long run surplus without any increase in other tax rates.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment incentives (G31) | Capital formation (E22) |
| Deficit-financed savings incentives (H62) | Long-run capital stock (E22) |
| Deficit-financed investment incentives (E62) | Long-run surplus (D69) |
| Investment incentives (G31) | Capital stock (E22) |
| Redistribution of wealth from current holders (D30) | Individuals with lesser claims on capital (G19) |