Evaluating Fiscal Policy Reforms Using the Fiscal Frontier

Chen, Xiaoshan; Leith, Campbell; Ricci, Mattia

Abstract

We develop a Fiscal Frontier which traces out the maximum government debt level that can be sustained at a given welfare cost. Through duality, the intertemporal policy mix underpinning the Frontier mirrors standard Ramsey policy and de nes an upper limit on the welfare gains that can be achieved by any scal reform. The Frontier is then used to evaluate a variety of scal reforms: (1) one-off changes in tax instruments considered in La er curve calculations, (2) a gradual reduction in capital taxation proposed by Lucas (1990), and (3) scal consolidation strategies akin to CBO (2018). Conventional Laffer curve calculations significantly under-estimate the sustainable debt of the US. The desirable pace of capital tax abolition has slowed since the 1970s as debt levels have risen and tax rates fallen, but the reform remains close to the Frontier. Achieving debt reduction targets considered by the CBO is typically very costly, especially when that target must be achieved quickly, but a simultaneous capital tax reform can more than offset those costs.

Citation

Chen, X., Leith, C., & Ricci, M. (2023). Evaluating Fiscal Policy Reforms Using the Fiscal Frontier. Journal of Economic Dynamics and Control, 155, Article 104733. https://doi.org/10.1016/j.jedc.2023.104733

• Journal Article Type: Article
• Acceptance Date: Aug 21, 2023
• Online Publication Date: Sep 6, 2023
• Publication Date: 2023-10
• Deposit Date: Aug 22, 2023
• Publicly Available Date: Sep 14, 2023
• Journal: Journal of Economic Dynamics and Control
• Print ISSN: 0165-1889
• Electronic ISSN: 1879-1743
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 155
• Article Number: 104733
• DOI: https://doi.org/10.1016/j.jedc.2023.104733
• Public URL: https://durham-repository.worktribe.com/output/1722800
• Publisher URL: https://www.sciencedirect.com/journal/journal-of-economic-dynamics-and-control
• Related Public URLs: https://dx.doi.org/10.2139/ssrn.4309878