Research Report Tax Policy Design with Low Interest Rates
Alan J. Auerbach, William G. Gale
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Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future.  It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices.  In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs. 

Research Areas Taxes and budgets
Tags Federal budget and economy Federal tax issues and reform proposals
Policy Centers Urban-Brookings Tax Policy Center