Tax Reform, Welfare, and Intergenerational Redistribution - An Intertemporal Simulation Approach

Svend Erik Hougaard Jensen, Soeren Bo Nielsen, Lars Haagen Petersen and Peter Birch Soerensen

No 93-01, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper analyses the effects of cuts in the marginal tax rates on income from labour and capital on the macroeconomy and on the intergenerational distribution of welfare in a small open economy. For this purpose we et up a computable general equilibrium model incorporating overlapping generations, imperfect competition in the labour market, accumulation of housing and business capital, and a public pension system. We find that a revenue-neutral cut in the marginal labour tax rate yields a Pareto-improvement, whereas a fall in the capital income tax rate tends to benefit the current older generations as well as future generations at the expense of generations entering the economy in the years around the time of the reform. However, by preannouncing the cut in the capital income tax rate, the welfare losses for the young generations can be almost eliminated.

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Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:93-01

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