Tax Policy Design with Low Interest Rates

Alan Auerbach and William Gale

No 29352, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

JEL-codes: E43 H20 H23 (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-env, nep-mac and nep-pub
Note: PE
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Published as Tax Policy Design with Low Interest Rates , Alan J. Auerbach, William G. Gale. in Tax Policy and the Economy, Volume 36 , Moffitt. 2022

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