TAX-RATE UNCERTAINTY, FACTOR SUPPLIES, AND WELFARE

Uncertainty about prospective changes in tax rates may increase factor supplies, and hence the tax base, permitting a reduction in tax rates that could result in a net increase in welfare. Under empirically rel evant assumptions about attitudes towards risk we find that when an in dividual exclusively saves or works, the tax base rises in response to greater tax-rate uncertainty, so that welfare could indeed increase. However, when an individual both saves and works, the supply of the ra ndomly taxed factor declines with increased uncertainty, implying that tax revenue and welfare decrease when the nonrandom tax rate is suffi ciently low.