Tax reform, welfare and intergenerational redistribution

Svend Erik Hougaard Jensen, Søren Nielsen, Lars Haagen Pedersen and Peter Birch Sørensen

No 211, Discussion Papers, Series II from University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy"

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 set 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.

Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kondp2:211

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