BFI NewsMay 23, 2018

Lars Peter Hansen Reflects on the Two-Day Taxation and Fiscal Policy Conference

One of the principle aims of the original Milton Friedman Institute, continued with the expanded Becker Friedman Institute, is to provide an intellectual destination for the assessment of the best frontier research in economics. One, and arguably the most important, way this is achieved is through targeted research conferences which bring scholars together with common interests but possibly diverse approaches to exchange ideas and critically assess new research. The exchange of ideas nurtures new research and the critical assessment improves existing research or research in progress. Researchers or small groups of researchers can write working papers on their own, but exposure of this research to the critical eyes of other scholars is a vital part of research production.

On May 18 and 19, 2018, the MFR program, within the Becker Friedman Institute brought an elite group of scholars to the University of Chicago to explore taxation and fiscal policy. The conference was organized by my colleague, Mikhail Golosov, along with Stefanie Stantcheva who is a professor at Harvard University. The aim of this research conference was different from op-ed debates in the media conveying tax policy opinions informed in part by a stock of knowledge drawing on a variety of previous studies. While conveying informed opinions can be socially valuable in structuring politically feasible policy changes, this conference chose instead to take a longer term and a broader attack on the taxation challenges divorced from the political arena.

The conference continued a series of conferences that the BFI has hosted on taxation, debt and monetary policy. At this conference, researchers asked a range of critical questions, including:

  • Could capital taxation influence socially productive investments in research and development?
  • What are the costs and benefits to making marginal tax rates depend explicitly on the age of the person paying taxes?
  • What are the social costs and gains to imposing constraints that limit how fiscally irresponsible governments are allowed to be on a period-by-period basis?
  • What are the implications for tax policy when model builders relax the benchmark rationality specifications commonly used in economics?

These are just some of the intriguing questions that were explored over a day and half event. The “output” from such a conference is not a set of fully convincing answers to all of these questions embraced by a complete consensus of researchers. Instead the intellectual engagement and feedback is a vital part of enhancing our understanding of important policy relevant questions and exposing remaining gaps in our knowledge.

Addressing the first question requires both modeling and empirical inputs and invariably leads to more questions. How do we best model the impact of private sector research today on both private and social economic benefits in the future? How are large are the social benefits to private investment in research? What other policy tools might be used to better nurture the social returns to investment? The conference paper helps to open the door to a variety of important research tasks.

In terms of the second question, while I do think of income taxation as typically being age dependent, the broader tax system including, say social security, certainly contains taxes and subsidies that are age dependent. It becomes valuable to step back and ask to look more broadly at tax policy as this paper does.

For the third question, governments are often tempted to push problems down the road as we have seen in recent congressional bills. There is an age old problem of how to design better rules that limit how much “can kicking down the road” governments are allowed to do.

The fourth question might look esoteric in nature. In fact, there is a variety of research looking at how to model decision making in complex environments. These prior advances set the stage for this paper. It opens the door to some hard questions. In these more complex settings, how do we imagine decision makers change their behavior when the policy environment is altered? While this paper focuses on private sector behavior responses, it would seem perhaps equally if not more important to ask about such responses on the part of the government. There is often a naïve call for the implementation of policies correcting private sector distortions when ignoring challenges posed by governmental implementation.

These are just some of the fascinating questions that conference participants were exposed to. To conclude, not only do such conferences help to assess the new flow of ideas on important policy questions, but they also help us re-evaluate the stock on knowledge that has accumulated over time.

View photos from the event below:

Taxation and Fiscal Policy Conference