Growth, Finance, and Welfare Effects of Anticipated Tax Reforms and Temporary Tax Cuts

Macroeconomic analysis of tax reform in dynamic general equilibrium usually assumes that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow tax reforms to be pre-announced and of finite duration and these facts are anticipated by households and firms. Interestingly, we find that the welfare gain of the representative consumer changes only little when pre-announcment is taken into account. This result, however, hides the fact that (possibly large) welfare differentials before and after enactment of a policy change are balancing each other. It implies that the anticipation of tax reforms entails important intergenerational distribution effects. This is even the more true when the termination of a tax cut is anticipated. As a (non-generalizable) rule we find that the generation that becomes economically active when a temporary tax cut is terminated benefits most. These benefits are at the expense of older generations already active when a temporarily lower tax rates apply.