Generational Policy and the Macroeconomic Measurement of Tax Incidence

• BSE Working Paper: 110844 | September 15
• Keywords: Generational Accounting , Ramsey Taxation
• JEL codes: E62, H21
• Generational Accounting
• Ramsey Taxation

In this paper we show that the generational accounting framework used in macroeconomics to measure tax incidence can, in some cases, yield inaccurate measurements of the tax burden across age cohorts. This result is very important for policy evaluation, because it shows that the selection of tax policies designed to change generational imbalances could be misleading. We illustrate this problem in the context of a Social Security reform where we show how fiscal policy can affect the intergenerational gap across cohorts without impacting the distribution of welfare. We provide a more accurate procedure that only measures changes in generational imbalances derived from policies with real effects.