The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model
IMF Working Papers, December 1, 1998
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Bibliographic details
- Authors: Ben J. Heijdra, Jenny E Ligthart
- Published: December 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859249.001
Summary
- Studies dynamic allocation effects of tax policy in an overlapping generations model of the Blanchard-Yaari type.
- Extends the model to allow for endogenous labor supply and three tax instruments: a capital income tax, labor income tax, and consumption tax.
- Uses analytical expressions and simple diagrams to discuss impact, transition, and long-run effects of tax policy changes.
- Key result: a part of the long-run incidence of capital and consumption taxes falls on capital when households’ horizons are finite, whereas labor would fully bear the burden of these taxes in an infinite horizon model.
Model features and methods
- Model: overlapping generations (Blanchard-Yaari type).
- Behavioral margins: endogenous labor supply.
- Tax instruments: capital income tax, labor income tax, consumption tax.
- Analytical approach: closed-form analytical expressions and illustrative diagrams to trace impact, transition dynamics, and long-run equilibria.
Main findings and implications
- Long-run incidence of capital and consumption taxes:
- With finite household horizons: part of the long-run incidence falls on capital.
- With infinite horizon models: labor would fully bear the burden of capital and consumption taxes.
- Transition dynamics and allocation effects are analyzed to show how tax changes propagate over time through capital accumulation, labor supply, and interest rates.
- Emphasizes the role of household horizon assumptions (finite vs. infinite) in determining distribution of tax burdens between capital and labor.
Policy-relevant insights
- Tax policy evaluation must account for household lifetime horizon assumptions when attributing incidence between capital and labor.
- Distinguishing between short-run transition effects and long-run incidence is crucial for designing tax instruments (capital income tax, labor income tax, consumption tax) and anticipating their distributional consequences.
- Endogenous labor supply alters how tax changes affect allocations and welfare relative to models with exogenous labor supply.
Content in this bundle
- The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model - WP/98/182