Quantifying tax effects under policy foresight |
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Authors: | Shu-Chun Susan Yang |
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Institution: | United States Congress, Joint Committee on Taxation, USA |
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Abstract: | Studies of tax effects make the conventional information assumption that changes in period-t taxes become known at t. Legislative lags, however, imply that news arrives before tax changes take place. Under policy foreknowledge, the conventional information structure is therefore misspecified. Simulations of a standard neoclassical growth model suggest that foresight of only one quarter can distort substantially the estimates of tax effects obtained under the no-foresight assumption. Also, it is crucial to model capital and labor taxes separately: anticipated changes in these two tax policies have opposite effects on consumption, investment, labor, and output before policy realization. |
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Keywords: | C32 E62 |
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