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Neoclassical growth models predict positive growth effects throughout the entire transition path after a reduction in capital or labor tax rates when lump-sum taxes or transfers are used to balance the government budget. In contrast, debt-financed tax cuts can generate a complex set of dynamic interactions between current and expected future policy. Yang considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. Static scoring of tax revenue impacts, which assumes no feedback from taxes to national income, does not necessarily overstate the revenue loss when compared with dynamic scoring.
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Title Annotation:business cycles-models
Publication:NBER Reporter
Article Type:Brief Article
Geographic Code:1USA
Date:Jun 22, 2005
Previous Article:Johnson.
Next Article:Kopczuk.

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