Intergenerational Politics, Fiscal Policy and Productivity

A political-economic theory of fiscal policy is presented in which tax policy preferences are derived from a conflict of interest between individuals of different ages. Policy formation is fully rational in that an individual's beliefs regarding future policies are consistent with state-contingent policy outcomes. The overlapping generations friction that prevents the young from transacting with future members of society implies that young policymakers strategically manipulate the policy preferences of the yet unborn to lower their own expected old-age tax burden. A comparison of the original equilibrium to one induced by the "constitutional commitment" of fiscal policy isolates the strategic component of tax rates and demonstrates that aggregate labor productivity is biased as a result of the conflict. (Copyright: Elsevier)