Working Paper: NBER ID: w25388
Authors: James R. Hines Jr.; Michael Keen
Abstract: This paper explores the implications of tax rate uncertainty, identifying circumstances in which revenue-neutral tax rate variability increases profitability, economic activity, and the efficiency of resource allocation. Furthermore, with heterogeneous taxpayers, tax rate variability is shown to perform an efficiency-enhancing screening function, imposing heavier expected tax burdens on less responsive taxpayers. And while efficient tax uncertainty enables governments to reduce average costs of taxation, it necessarily increases the marginal cost of taxation over some ranges of expected revenue, so may reduce efficient levels of government spending.
Keywords: tax uncertainty; economic activity; efficiency; resource allocation
JEL Codes: H21; H22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax rate variability (H29) | profitability (L21) |
| tax rate variability (H29) | economic activity (E20) |
| tax rate variability (H29) | input purchases (E20) |
| tax rate variability (H29) | expected profits (D33) |
| tax uncertainty (H26) | expected tax revenue (H29) |
| tax uncertainty (H26) | average tax rate (H29) |
| tax rate variability (H29) | expected tax burdens (H22) |
| tax rate variability (H29) | efficiency (D61) |
| tax rate variability (H29) | deadweight loss (H21) |
| taxpayer heterogeneity (H31) | expected input use (C67) |
| taxpayer heterogeneity (H31) | output (C67) |