Working Paper: NBER ID: w1947
Authors: Jonathan Skinner
Abstract: Frequent shifts in tax policy can increase uncertainty about future \nnet-of-tax wages and interest income. This paper measures the impact of \nuncertain tax policy on savings, labor supply, and welfare in the United \nStates. A vector autoregression model with six variables was estimated \nwhich found the standard error of the one-year-ahead forecast for the wage \ntax to be 1.8 percentage points, and for the interest income tax 3.3 \npercentage points. Furthermore, the negative correlation between \nunanticipated shifts in the real interest rate and changes in the interest \nincome tax amplifies the variability in the real after-tax return. \nA two-period model of consumption and labor supply is developed that \nmeasures the effect of uncertain taxes on savings, work hours, and taxpayer \nwelfare. Using plausible empirical parameters, it is shown that removing \nall uncertainty about future tax policy can lead to a welfare gain of 0.4 \npercent of national income, or about 12 billion dollars in 1985.
Keywords: tax policy; uncertainty; welfare; savings; labor supply
JEL Codes: H21; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Frequent shifts in tax policy (H22) | Increase uncertainty about future net-of-tax wages and interest income (H31) |
| Unanticipated shifts in the real interest rate (E43) | Changes in the interest income tax (H29) |
| Removing uncertainty about future tax policy (H29) | Welfare gain of 0.4 percent of national income (D69) |
| Uncertain taxes (H29) | Adverse effects on savings and labor supply decisions (H31) |