Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending
This paper analyzes optimal pre-announced capital and labor income tax reforms
under valuable and productive government spending. Our baseline
optimal reform reveals that these model ingredients result in a reduction of
welfare losses that occur when the reform is announced before its implementation.
Further, the mere existence of welfare losses from pre-announcement
is due to the ability of the government to initially choose very high capital
taxes and negative labor taxes. A government that instead chooses optimal
long run taxes from the implementation date onwards generates sizable increases
of welfare gains from pre-announcing the reform. We show that 4
years pre-announcement of this reform and the baseline optimal reform deliver
similar levels of welfare gains. The underlying tax structure of both
reforms, however, appears to be very different
Optimal taxation, pre-announcement, valuable and productive government spending, welfare
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