Dynamic Tax Incidence and Intergenerationally Neutral Reform

Abstract: The paper proposes a basic definition of intergenerational neutrality in the overlapping generations model when agents have a pure life cycle motive of savings. The derivation of intergenerationally neutral tax effects provides a redistribution free benchmark case that isolates the relative price effects of taxes and the deadweight losses associated with them. The paper clarifies the intergenerational incidence which has to be determined simultaneously with the substitution effects oftaxes on savings and growth. Intergenerational neutrality of fiscal policy may be obtained by an endogenously determined transfer policy. A tax reform example demonstrates how taxes with diverging intergenerational incidence may be combined, first, to preserve equal revenues and, second, to keep the reform intergenerationally neutral by properly controlling for redistribution across generations. The second constraint ensures that the reform is Pareto improving.;