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Optimal Timing of Tax Policy in the Face of Projected Debt Increases

Publication Details

  • Optimal Timing of Tax Policy in the Face of Projected Debt Increases (WP 16/02)
  • Published: 10 Mar 2015
  • Status: Current
  • Authors: Creedy, John; Scobie, Grant M; Ball, Chris
  • Pages: (2),iv,31
  • ISBN: 978-0-947519-14-8 (Online)
  • Ref. No: WP 16/02
  • Pub. type: Working Papers
  • JEL Classification: H62; H63; H68
 

Optimal Timing of Tax Policy in the Face of Projected Debt Increases

Published 21 Jun2016

Author: Christopher Ball, John Creedy and Grant Scobie

Abstract

This paper examines the optimal time path of the tax rate,in a model where an increasing ratio of government debt to GDP is projected in the absence of policy changes. Tax policy changes have feedback effects, as a result of incentives and other endogenous influences which impose constraints on the efficacy of those policies. Emphasis is given to the importance of uncertainty in devising an optimal policy. A welfare function is maximised, allowing for a range of variables, including the excess burden of taxation and a desired debt ratio.

Contents

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Executive Summary

1 Introduction

2 The Projection Model

3 An Evaluation Function

4 Optimal Tax Rates in The Deterministic Model

5The Stochastic Model

6 Optimal Tax Rates in The Stochastic Model

7 Conclusions

Appendix A: Formal Statement of The Model

Appendix B: Redistribution

Bibliography

wp16-02.pdf (650 KB) pp. (2),iv,1–31

Acknowledgements

We are grateful to Bob Buckle, Andrew Coleman, Arthur Grimes, Michael Johnston, Suzy Morrissey and Tugrul Vehbi for their helpful comments on an earlier draft of this paper.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

 

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