The Economic Costs of Tax Policy Uncertainty: Implications for Fundamental Tax Reform

31 Pages Posted: 29 Nov 2012

See all articles by Seth H. Giertz

Seth H. Giertz

School of Economic, Political and Policy Sciences

Jacob M. Feldman

Independent

Date Written: November 27, 2012

Abstract

The U.S. faces tremendous short-term policy uncertainty, including about $5.4 trillion in tax increases over the next decade. These changes are set to take effect on January 1, 2013. It is unlikely that these changes will fully materialize, but what will happen is anyone’s guess. Over the long term, uncertainty also looms large since the U.S. federal tax system is expected to bring in far less revenue than Congress is projected to spend. In this paper, we detail the tax policy uncertainty that the U.S. faces and the economic literature to assess how this uncertainty may be affecting the economy. We then build on this literature by posing an additional avenue through which policy uncertainty may harm the economy. We argue that uncertainty fosters rent-seeking, which represents a shift between productive and unproductive or destructive entrepreneurship. We present a simple empirical model that lends support to our hypothesis. We then discuss principles for tax reform that could result in more stable tax policy.

Keywords: Economic uncertainty, tax uncertainty, Bush tax cuts, unproductive entrepreneurship, destructive entrepreneurship, rent seeking, fiscal cliff

JEL Classification: D72, E62, H2, J24, L26

Suggested Citation

Giertz, Seth H. and Feldman, Jacob M., The Economic Costs of Tax Policy Uncertainty: Implications for Fundamental Tax Reform (November 27, 2012). Available at SSRN: https://ssrn.com/abstract=2182161 or http://dx.doi.org/10.2139/ssrn.2182161

Seth H. Giertz (Contact Author)

School of Economic, Political and Policy Sciences ( email )

800 W. Campbell Rd,, GR 31
School of Economic, Political and Policy Scienc
Richardson, TX 75083
United States

Jacob M. Feldman

Independent

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
210
Abstract Views
1,619
Rank
262,884
PlumX Metrics