SFB 303 Discussion Paper No. A - 328

Author: Keuschnigg, Christian
Title: Intergenerational Incidence and Pareto Improving Tax Reform
Abstract: I. Introduction II. The Life Cycle Growth Model. III. Intergenerational Incidence of Taxes. IV. Pareto Improving Tax Reform. V. Conclusions. The paper clarifies the intergenerational incidence of taxes in the overlapping generations model when agents have a pure life cycle motive of savings. The intergenerational incidence also characterizes the tax policy's potential for redistribution across generations. Since present and future generations are not linked via an operative altruistic bequest motive, such intergenerational redistribution is non-neutral in the pure life cycle model. The Ricardian neutrality proposition does not hold. If the tax policy is concerned with Pareto improvements of an initially distorted equilibrium, it is important to control for possibly adverse effects on utility of some agents by unintended intergenerational redistribution. For example, intertemporal distortions may be reduced by granting investment incentives. The paper shows how taxes with different intergenerational incidence must be combined, first, to preserve revenue neutrality and, second, to keep the reform Pareto improving by properly controlling for redistribution across generations.
Creation-Date: January 1991 
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