Browsing by Author "Mielikäinen, Lasse"

Dynamic scoring is an approach, which strives to take into account the effects that public policy changes and changes in the law have on the macroeconomic variables. Scoring is an estimate of the effects the policy change is expected to bring. Compared to the traditional approach, dynamic scoring offers more information of the effects, but does this with increased uncertainty. In their paper “Dynamic scoring: A back-of-the-envelope guide” (2006) N. Gregory Mankiw and Matthew Weinzierl use neoclassical growth model, or Ramsey growth model, to examine how large a part of capital and labor income tax cuts pay for themselves by inducing higher economic growth, i.e. the size of the dynamic feedback effect. Their focus is on the changes of tax revenue. They use first a basic model with Cobb-Douglas production and inelastic labor supply, then relax those assumptions for a more general Ramsey model and then in turn include parameters allowing for finite horizon households, imperfect competition, and externalities to capital investment. Depending on the model used, the dynamic feedback effect varies from model to model, for a capital tax cut from 50 to 74 percent and for a labor income tax cut from zero (with inelastic labor supply) to 21 percent. This thesis extends the Mankiw–Weinzierl model by including a tax on consumption to examine how this affects the dynamic feedback effect. In all the models, there is an increase in the dynamic feedback effect: depending on the model used, it varies for a capital tax cut from 60 to 87 percent and for a labor income tax cut from zero (with inelastic labor supply) to 25 percent. The values of some of the key parameters, namely the constant-consumption elasticity of labor supply and the elasticity of substitution between capital and labor, and the tax rates are revised as well. This further increases the dynamic feedback effect all along the line, in some cases even suggesting a capital tax cut to more than compensate the static revenue loss. Including a tax on consumption into the models increases the dynamic feedback effect, working into the same direction as rising the initial rates of capital and labor income taxes. Using alternative tax rates and values of the key parameters also has a significant impact on the size of the dynamic feedback effect.