Taxes, Saving, and Welfare: Theory and Evidence

The purpose of this paper is to review theoretical analysis and results of empirical research on the effects of taxation on private saving and economic welfare. One basic conclusion of section II is that long-established results of theoretical analysis are often ignored or misunderstood by economists, as well as by policy-makers, and the lessons of more recent theoretical analyses of optimal taxation have been only dimly perceived. This generally inadequate conceptual state of affairs is mirrored in empirical analysis, the subject of section III, where it appears that the few serious scholars working at trying to untangle the effects of taxation on saving and welfare have not always been asking -- or even recognizing -- the "right"questions. But the problems of empirical analysis go beyond those that result from failure to frame the research question carefully. Limitations posed by inadequate data and econometric difficulties make it difficult even to arrive at a satisfactory answer to the wrong question.