Dynamic Scoring: Alternative Financing Schemes
Eric M. Leeper
Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER); Monash University, Department of Economics
Shu-Chun S. Yang
December 19, 2006
CAEPR Working Paper No. 2006-022
Neoclassical growth models predict that reductions in capital or labor tax rates are expansionary when lump-sum transfers are used to balance the government budget. This paper explores the consequences of bond-financed tax reductions that bring forth a range of possible offsetting policies, including future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can be contractionary. The paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts.
Number of Pages in PDF File: 26
Keywords: Revenue feedback, capital tax, labor tax, debt management
JEL Classification: H2, H3, H6
Date posted: December 19, 2006
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