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Oxford Economic Papers 2000; 52:677-701
Copyright © 2000 Oxford Universty Press

Article

The dynamic macroeconomic effects of tax policy in an overlapping generations model

BJ Heijdraz and JE Ligtharty

z Department of Economics, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands
E-mail: b.j.heijdra@eco.rug.nl
y Fiscal Affairs Department, International Monetary Fund, 700 19th Street, NW, Washington, DC, 20431, USA
E-mail: jligthart@imf.org

Abstract

The paper studies the dynamic allocation effects of tax policy within the context of an overlapping-generations model of the Blanchard-Yaari type. The model is extended to allow for endogenous labour supply and three tax instruments, viz. a capital tax, labour income tax, and consumption tax. Both analytical expressions and simple diagrams are used to analyze the impact, transition, and long-run effects of tax policy changes. It is shown that a part of the long-run incidence of capital and consumption taxes falls on capital when households' horizons are finite whereas labour would fully bear the burden of these taxes in an infinite-horizon model.


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