A note on the short run versus long run welfare gain from a tax reform

Abstract

This note discusses the welfare implications of the phenomenon that the long-term response to a tax reform is often much stronger than the impact in the short run. As a polar case a beneficial revenueneutral reform is considered whereby the tax is increased on the consumption of a commodity that is fixed in the short run, but flexible in the long run. The message of this note is that the welfare gain may be greater in the short run. The reason is that the larger long-term response can be socially undesirable because it represents a distortionary effect.