Resource title

Anticipated tax reforms and temporary tax cuts: a general equilibrium analysis

Resource image

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Resource description

Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain from announcement of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that adjustment dynamics of important variables like firm value, dividend payout, and investment differs qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results.

Resource author

Holger Strulik, Timo Trimborn

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/27215

Resource license

Adapt according to the presented license agreement and reference the original author.