QUANTITATIVE EVALUATIONS OF EFFICIENT TAX POLICIES FOR LUCAS SUPPLY-SIDE MODELS

Robert Lucas' recent paper on 'Supply-side Economics' finds a large we lfare loss from taxation of interest income in the US economy. The pre sent work extends the analysis of steady-state equilibria to cover the transition paths which accompany tax reform. Calculations then show a 25% reduction in taxes on capital's income, instituted through a care fully designed sequence of steps, yielding a 1-1.50/ welfare gain. The analysis also considers government debt and an investment tax credit. In addition, it reveals a potential problem with one aspect of the mo del's stability properties, when growth is purely endogenous.