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
Date posted: November 29, 2012
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