Tax-Rate Uncertainty, Factor Supplies, and Welfare

Iltae Kim, Arthur Snow and Ronald Warren

Economic Inquiry, 1995, vol. 33, issue 1, 159-69

Abstract: Uncertainty about prospective changes in tax rates may increase factor supplies and, hence, the tax base, permitting a reduction in tax rates that could result in a net increase in welfare. Under empirically relevant assumptions about attitudes towards risk, the authors find that, when an individual exclusively saves or works, the tax base rises in response to greater tax-rate uncertainty, so that welfare could indeed increase. However, when an individual both saves and works, the supply of the randomly taxed factor declines with increased uncertainty, implying that tax revenue and welfare decrease when the nonrandom tax rate is sufficiently low. Copyright 1995 by Oxford University Press.

Date: 1995
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