B4.2 Summary

Our analysis of tax reform and intergenerational incidence may be summarized in Table 9.B1, which shows that if r > n, tax reform has different impacts on the current older generation and the current younger and future generations. Namely, the tax reform (T1 ! T2) harms the current older generation and benefits the future generation. However, the reverse tax reform (T1 — T2) benefits the existing older

Table 9.B1 Tax reform and intergenerational incidence

Tax

Reform

Current older generation

Near future generation

Distant future generation

y1 _^ y2

r > n

DTR(—)

TPP(+)

TPP(+)

TTT(+)

PTT(+)

r < n

DTR(—)

TPP(—)

TPP(—)

TTT(+)

PTT(—)

y1 ^_ y2

r > n

DTR(+)

TPP(—)

TPP(—)

TTT(—)

PTT(—)

r < n

DTR(+)

TPP(+)

TPP(+)

TTT(—)

PTT(+)

Notes: (i) (+) means a favorable effect, and (—) means an unfavorable effect

(ii) DTR denotes the direct tax reform effect, TPP denotes the tax postponement effect, TTT

denotes the temporary tax timing effect, and PTT denotes the permanent tax timing effect generation and harms the future generation. This is a trade-off relationship between the current older generation’s welfare and the future generation’s welfare.

As is well known, if r > n, the growth path is efficient in the sense that no generation is better off unless some generations are worse off. In contrast, suppose the growth path is inefficient: r < n. Then, tax reform affects the welfare of the current older generation and the distant future generation in the same direction. However, even in this situation, if a member of the current older generation anticipates the tax reform, the temporary capital accumulation effect produces a trade-off relationship between the current older generation and the future generation that is close to the present.

 
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