26 Pages Posted: 19 Dec 2006
Date Written: December 19, 2006
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.
Keywords: Revenue feedback, capital tax, labor tax, debt management
JEL Classification: H2, H3, H6
Suggested Citation: Suggested Citation
Leeper, Eric M. and Yang, Shu-Chun S., Dynamic Scoring: Alternative Financing Schemes (December 19, 2006). CAEPR Working Paper No. 2006-022. Available at SSRN: https://ssrn.com/abstract=952539 or http://dx.doi.org/10.2139/ssrn.952539