44 Pages Posted: 15 Jun 2014 Last revised: 6 Apr 2015
Date Written: October 20, 2014
Calculating the welfare implications of changes to economic policy or shocks to the economy requires economists to decide on a normative criterion. One way to make that decision is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference exercise as in, for example, the recent surge of so-called “inverse-optimum” research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse-optimum inference on U.S. tax policy from 1979 through 2010 and identify two broad explanations for its evolution. These explanations, however, either undermine the reliability of the inference exercise's conclusions or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations. We emphasize the need for better evidence on society's positive and normative judgments in order to resolve the questions these findings raise.
Suggested Citation: Suggested Citation
Lockwood, Benjamin B and Weinzierl, Matthew, Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions (October 20, 2014). Harvard Business School BGIE Unit Working Paper No. 14-119. Available at SSRN: https://ssrn.com/abstract=2448954 or http://dx.doi.org/10.2139/ssrn.2448954