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This research aims to shed light into the future tax and public spending implications of the current economic crisis.

Public debt as share of output is expected to increase by around 20 percentage points within two years of the start of the crisis in summer 2008. Thus, a combination of higher future taxes and cuts in government expenditure will be required to service this debt.  Given that distortionary taxation has effects on the efficiency of resource use, the distribution of income and in turn on growth and welfare, it is critical that future tax and spending policies be designed with these considerations in mind.

Focusing on the UK and US economies, this project further intends to deliver a set of policy recommendations relating to:

1. the optimal tax-mix when there is pressure to stabilise the public debt;
2. the optimal capital-to-labour income tax ratio in the presence of the politically expedient trend to rely on higher consumption taxes to raise revenue;
3. the optimal tax-spending mix when public expenditure also has effects on the distribution of income;
4. the effects of permanent and temporary technology changes on the optimal capital-to-labour income tax ratio.
   

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