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A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes

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Published/Copyright: January 14, 2022

Abstract

In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.

JEL Classification: E60; H20; H30

Corresponding author: Arman Mansoorian, Department of Economics, York University, Toronto M3J 1P3, Canada, E-mail:

Acknowledgments

We would like to thank the editor of this journal and one anonymous referee for very insightful comments, which have led to substantial improvements in the quality of this paper. Suggestions from Andrey Stoyanov are also acknowledged.

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Received: 2021-01-26
Revised: 2021-09-19
Accepted: 2021-12-20
Published Online: 2022-01-14

© 2022 Walter de Gruyter GmbH, Berlin/Boston

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