The Treasury published a new Working Paper today on tax policy modelling.
Optimal Timing of Tax Policy in the Face of Projected Debt Increases is written by Christopher Ball, John Creedy and Grant Scobie. This paper examines the optimal time path of the tax rate, in a model where an increasing ratio of government debt to GDP is projected in the absence of policy changes. Tax policy changes have feedback effects, as a result of incentives and other endogenous influences which impose constraints on the efficacy of those policies. Emphasis is given to the importance of uncertainty in devising an optimal policy. A welfare function is maximised, allowing for a range of variables, including the excess burden of taxation and a desired debt ratio.
Working Papers can be viewed on the Treasury website at http://www.treasury.govt.nz/publications/research-policy/wp.
The views, opinions, findings, and conclusions or recommendations expressed in Treasury Working Papers are strictly those of the authors and do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government.