Tax Policy and Consumer Foresight: A General Equilibrium Simulation Study

Charles Ballard ()

Economic Inquiry, 1987, vol. 25, issue 2, 267-84

Abstract: This paper presents a dynamic, computational, general-equilibrium model in which expectations regarding future prices can be varied systematically. T he model is employed to evaluate how expectations influence the effec t of long-run tax policy changes. Under policies (like a consumption tax) that reduce rates of return over time, individuals with perfect foresight save less than individuals with myopic beliefs. This is bec ause consumers with foresight are better able to anticipate the lower returns. Lower saving means that existing distortions due to capital taxes are not offset as much, so that welfare gains are smaller unde r perfect foresight. Copyright 1987 by Oxford University Press.

Date: 1987
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