Working Paper: NBER ID: w21927
Authors: Benjamin B. Lockwood; Matthew C. Weinzierl
Abstract: Calculating the welfare implications of changes to economic policy or shocks requires economists to decide on a normative criterion. One approach is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference, as in the recent surge of "inverse-optimum" research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse-optimum inference on U.S. tax policy from 1979 through 2010 and argue that the results either undermine the normative relevance of the approach or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations.
Keywords: Tax Policy; Welfare Economics; Inequality; Elasticity of Taxable Income
JEL Codes: D63; E32; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. tax policy from 1979 to 2010 (H26) | lower redistributive preferences (D63) |
| higher MSWWs for high earners (J31) | potential failure of the political system to reflect societal preferences (D72) |
| rising inequality from 1979 to 2010 (D31) | significant welfare costs (D69) |
| unequal growth and recessions (F44) | disproportionately affect high earners (H31) |
| unequal growth and recessions (F44) | complicate welfare evaluations (I38) |
| existing models may not adequately capture societal costs (F12) | complicate welfare evaluations (I38) |