Working Paper: NBER ID: w29352
Authors: Alan J. Auerbach; William Gale
Abstract: Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.
Keywords: No keywords provided
JEL Codes: E43; H20; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | convergence in the burdens imposed by consumption and income taxes (H22) |
| low interest rates (E43) | wealth taxes become less efficient compared to capital income taxes (H21) |
| low interest rates (E43) | reduction in the value of firm-level investment incentives (H32) |
| low interest rates (E43) | substantial increase in the valuation of carbon abatement benefits relative to costs (Q51) |