INTERGENERATIONALLY NEUTRAL TAXATION

The paper proposes a basic definition of intergenerational neutrality of fiscal policy in the life cycle model. The requirement of intergene rational neutrality imposes a restriction on the use of fiscal instrum ents that eliminates any welfare effects from intergenerational redist ribution and, thereby, isolates the price effects of fiscal policy. Th is restriction endogenously determines a distribution of tax revenues in the form of transfers to young and old agents which ensures interge nerational neutrality. The share of tax revenues rebated to young and old agents is interpreted as the intergenerational incidence of the ta x system. If revenues are not refunded to agents according to the inte rgenerational incidence of taxes, then redistribution in one or the ot her direction is installed. Hence, the derivation of intergenerational ly neutral tax effects provides a benchmark for evaluating the redistr ibutive content of an arbitrary fiscal program.