The Economic Costs of Tax Policy Uncertainty: Implications for Fundamental Tax Reform

Seth H. Giertz

University of Nebraska at Lincoln

Jacob M. Feldman

George Mason University - Mercatus Center

November 27, 2012

The U.S. faces tremendous short-term policy uncertainty, including about $5.4 trillion in tax increases over the next decade. These changes are set to take effect on January 1, 2013. It is unlikely that these changes will fully materialize, but what will happen is anyone’s guess. Over the long term, uncertainty also looms large since the U.S. federal tax system is expected to bring in far less revenue than Congress is projected to spend. In this paper, we detail the tax policy uncertainty that the U.S. faces and the economic literature to assess how this uncertainty may be affecting the economy. We then build on this literature by posing an additional avenue through which policy uncertainty may harm the economy. We argue that uncertainty fosters rent-seeking, which represents a shift between productive and unproductive or destructive entrepreneurship. We present a simple empirical model that lends support to our hypothesis. We then discuss principles for tax reform that could result in more stable tax policy.

Number of Pages in PDF File: 31

Keywords: Economic uncertainty, tax uncertainty, Bush tax cuts, unproductive entrepreneurship, destructive entrepreneurship, rent seeking, fiscal cliff

JEL Classification: D72, E62, H2, J24, L26

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Date posted: November 29, 2012  

Suggested Citation

Giertz, Seth H. and Feldman, Jacob M., The Economic Costs of Tax Policy Uncertainty: Implications for Fundamental Tax Reform (November 27, 2012). Available at SSRN: http://ssrn.com/abstract=2182161 or http://dx.doi.org/10.2139/ssrn.2182161

Contact Information

Seth H. Giertz (Contact Author)
University of Nebraska at Lincoln ( email )
Dept. of Economics
CBA 368, P.O. Box 880489
Lincoln, NE 68588
United States
(402) 472-7932 (Phone)
HOME PAGE: http://cba.unl.edu/people/profile.asp?id=1380
Jacob M. Feldman
George Mason University - Mercatus Center ( email )
3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States
Feedback to SSRN

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