Download Fiscal Policy and Saving Under Distortionary Taxation

Fiscal Policy and Saving Under Distortionary Taxation
Momi Dahan and Zvi Hercowitz, Journal of Monetary Economics, Vol.
42, No. 1, August 1998: 25-45.
Abstract
An empirical investigation of the effects of fiscal policy on saving is carried out
using Israeli data, which display large variability in both the saving rate and
the fiscal variables. The framework is a small open economy model with
distortionary taxation. The theoretical analysis of the partial effect of each
fiscal variable on the national saving rate takes into account the necessary
adjustment in future taxes. The present model predicts, for example, that the
income-tax rate should have a negative effect on saving – in contrast to the
Keynesian view – and that transfer payments and interest payments on the
public debt should have positive effects – in contrast to the Ricardian view
under lump-sum taxation. The empirical results partly support the predictions
of the model – in particular for the income-tax rate. The methodology consists
of two steps. First, quantitative predictions are obtained via simulation, and
then the simulated effects are compared with the estimated coefficients.
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