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Tax reform, welfare and intergenerational redistribution

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  • Hougaard Jensen, Svend Erik
  • Nielsen, Søren Bo
  • Haagen Pedersen, Lars
  • Birch Sørensen, Peter

Abstract

This paper analyses the effects of cuts in the marginal tax rates on income from labour and capital on the macroeconomy and on the intergenerational distribution of welfare in a small open economy. For this purpose we set up a computable general equilibrium model incorporating overlapping generations, imperfect competition in the labour market, accumulation of housing and business capital, and a public pension system. We find that a revenue-neutral cut in the marginal labour tax rate yields a Pareto-improvement, whereas a fall in the capital income tax rate tends to benefit the current older generations as well as future generations at the expense of generations entering the economy in the years around the time of the reform. However, by preannouncing the cut in the capital income tax rate, the welfare losses for the young generations can be almost eliminated.

Suggested Citation

  • Hougaard Jensen, Svend Erik & Nielsen, Søren Bo & Haagen Pedersen, Lars & Birch Sørensen, Peter, 1993. "Tax reform, welfare and intergenerational redistribution," Discussion Papers, Series II 211, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:211
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    3. Bovenberg, A.L. & Goulder, L.H., 1993. "Promoting investment under international capital mobility : An intertemporal general equilibrium analysis," Other publications TiSEM 3d211075-2c03-478d-b657-7, Tilburg University, School of Economics and Management.
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    7. Søren Nielsen, 1994. "Social security and foreign indebtedness in a small open economy," Open Economies Review, Springer, vol. 5(1), pages 47-63, March.
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