A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes

Mansoorian Arman (), Michelis Leo () and Angyridis Constantine ()
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Mansoorian Arman: Department of Economics, York University, Toronto M3J 1P3, Canada
Michelis Leo: Department of Economics, Ryerson University, Toronto M5B 2K3, Canada
Angyridis Constantine: Department of Economics, Ryerson University, Toronto M5B 2K3, Canada

The B.E. Journal of Macroeconomics, 2023, vol. 23, issue 1, 1-25

Abstract: In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.

Keywords: welfare measure; compensating variation; dynamic general equilibrium; labor income taxes (search for similar items in EconPapers)
JEL-codes: E60 H20 H30 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejm-2021-0024

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