Revisiting Offsetting Tax Reductions

The present paper makes a comparison of different non-revenue-neutral tax policy packages. We recommend that tax packages should be designed to neutralize either consumption or labor supply effects. The intent would be to offset the consumption or labor supply disruptions caused by domestic or external shocks. This paper aims to clarify which neutrality conditions, and which tax reductions can effectively counteract adverse events. The right policy responses will differ depending on the type of adverse events, the relationship between consumption and leisure, and the assumptions made about factor intensities. Among the array of policies under consideration, one stands out as particularly intriguing: reductions in both consumption and income taxes.