Working Paper: NBER ID: w1111
Authors: Don Fullerton; Andrew B. Lyon
Abstract: In this paper, we use tax policy choices to illustrate and investigate the more general problem of using uncertain parameter values in models to evaluate policy choices. We show, for this tax example, how debate on an elasticity parameter translates into a debate about policy choices, andvice versa. To construct this example, we suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain. We show how this gain from each reform depends upon the elasticity of saving with respect to the net rate of return. Within quite narrow and reasonable bounds for the elasticity parameter, we find regions in which each of three different tax reforms turns out to dominate the others.
Keywords: tax policy; elasticity of saving; general equilibrium model; tax reform
JEL Codes: H21; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| saving elasticity (H30) | welfare gain from tax reforms (H29) |
| saving elasticity (H30) | tax reform ranking (H21) |
| saving elasticity of 0.18 (D12) | tax imputed rents reform dominates (H29) |
| saving elasticity between 0.18 and 0.29 (C59) | integrating income taxes becomes more favorable (H29) |
| saving elasticity of 0.29 (D12) | integrating and indexing tax reforms provides greatest net gains (H29) |