Equal Yield Tax Alternatives and Government Deficits

Abstract

This article generalizes the traditional concept of equal yield tax alternatives to accommodate government deficits in an intertemporalframework. This generalization is important for the analysis of actual tax reform proposals. First, the comparison of the several equal yield alternatives developed in this article provides a measure of the marginal financial crowding-out effects of changes in government deficits induced by tax changes. Second, it suggests that the emphasis by policymakers on revenue neutrality as a proxy for deficit neutrality is misplaced and should be replaced by a direct emphasis on deficit neutrality. The generalized concept of equal yield is illustrated with a dynamic general equilibrium model of the U.S. economy and the analysis of the effects of integrating the personal and corporate income tax systems.