Fiscal policy and saving under distortionary taxation.


Momi Dahan and Zvi Hercowitz. 1998. “Fiscal policy and saving under distortionary taxation.” Journal of Monetary Economics, 1, Pp. 25.


An examination of Israeli economic data showed how fiscal variables can affect the savings rate equation in a small open economy. Distortionary income-tax policies were shown to have negative partial effects on the whole model, in contrast with the Keynesian framework that posits a positive comovement in both the income tax rate and national savings rate. This is due to the observation that a higher income tax rate signals a lower tax rate in the future due to intertemporal budget constraint. Other factors that enhanced national savings were higher consumption tax and unilateral transfers to the public sector of government funds.