“…This is because the accompanying budgetary regime -whether based on government spending or alternative distortionary taxation or deficit financing options-is not inconsequential for the macroeconomic effects of labor taxation. Several articles that have analyzed the consequences of labor taxes through intertemporal optimizing frameworks support this consideration by showing that widely different conclusions are reached according to the financing regime assumed; see, e.g., Auerbach andKotlikoff (1987), Judd (1987), Kotlikoff and Summers (1987), Hoon and Phelps (1996), Daveri and Tabellini (2000), Prescott (2004), Petrucci and Phelps (2005), and Van der Ploeg (2006). 1 For example, in a model with infinitely lived agents and a competitive labor market, Judd (1987) finds that a rise in labor income taxes reduces the labor supply and the capital stock when tax revenues are lump-sum distributed to consumers; 2 with government expenditure financing, instead, Turnovsky (1992) shows that labor and capital are ambiguously affected by wage taxation if preferences are nonseparable in consumption and leisure.…”