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Revisiting Offsetting Tax Reductions

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  • Takumi Haibara

Abstract

The present paper makes a comparison of different non-revenue-neutral tax policy packages. We recommend that tax packages should be designed to neutralize either consumption or labor supply effects. The intent would be to offset the consumption or labor supply disruptions caused by domestic or external shocks. This paper aims to clarify which neutrality conditions, and which tax reductions can effectively counteract adverse events. The right policy responses will differ depending on the type of adverse events, the relationship between consumption and leisure, and the assumptions made about factor intensities. Among the array of policies under consideration, one stands out as particularly intriguing: reductions in both consumption and income taxes.

Suggested Citation

  • Takumi Haibara, 2024. "Revisiting Offsetting Tax Reductions," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(4), pages 359-379.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2025-0002
    DOI: 10.1628/fa-2025-0002
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    More about this item

    Keywords

    consumption neutrality; labor supply neutrality; revenue neutrality; tax reductions; adverse shocks;
    All these keywords.

    JEL classification:

    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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