Transitional Welfare Effects of Capital Income Tax Reform in a Small Open Economy
Posted: 30 Apr 2012
Date Written: April 26, 2012
Abstract
I study the transitional welfare effects of a budget neutral reform in a small open economy with overlapping generations and age-dependent mortality. The reform eliminates the capital income tax and replaces it with a consumption tax. I simulate the model for Chile and calculate lifetime welfare effects. I find that the reform generates welfare gains for all generations and on all dates. Furthermore, welfare gains are increasingly positive over time. At the time of the reform, generations born before the reform experience smaller welfare gains than the generation born on that date. At the same age, future generations experience significantly larger welfare gains than existing generations.
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