on labor income. The erosion in tax revenue is more significant when the initial
tax rate on labor income is high, and the adjustment in the tax rate on labor
income increases when public spending requirements are higher. Hence, welfare
falls for both conscripts and non-conscripts when the initial tax rate on labor
income increases. This pattern is reflected in the last six columns in Table 3.
Moving across rows in Table 3, the results show that supplementary tax pay-
ments not surprisingly reduce welfare for conscripts. For example, the welfare loss
for conscripts in the new steady state is 1 percent when the initial tax rate on
labor income is 37.5 percent and the supplementary tax rate is 0 percent, while
the welfare loss for conscripts is 5.8 percent when the supplementary tax rate
is increased to 100 percent. Welfare effects are less certain for non-conscripts
when supplementary tax payments by conscripts increase. The tax base with
respect to the supplementary tax rate is unchanged for different public spend-
ing requirements. However, private income falls relative to total income in the
economy when public spending increases, and relative income transfers between
generations due to supplementary tax payments increase. Non-conscripts may
therefore experience a welfare loss in the long run from supplementary tax pay-
ments by conscripts when the initial tax rate on labor income is high. Our results
suggest that the welfare effect of using a draft tax generally is negative for non-
conscripts, although they may experience a marginal gain when a low wage tax
rate is accompanied by a high supplementary tax rate on conscripts.
The analysis is based on a stylized model, and the specific quantitative results
should be interpreted with caution. The model does not examine the dynamic
transition, and future generations may suffer because earlier generations benefit.
The only way to consider this inter-generational redistribution is to examine the
dynamic transition from the initial steady state to thefinal steady state. It seems
evident that such a move could require using public debt during the transition
in order not to increase the total tax burden of the transition generations, or
tax rates differentiated according to age during the transition. Specifically, the
oldest cohorts having been subject to draft should see their tax burden being
left unchanged, while young transition generations escaping draft tax might be
required to pay a slightly higher share of their income in ordinary income taxes to
finance transition. In order to find political support for the elimination of draft,
accepting such compensation mechanism might be attractive also for the young
otherwise subject to draft, as well as for the youngest generations exempt from
draft tax due to positive general equilibrium effects in the long run.
4.2 Sensitivity analysis
The qualitative results above hold within a wide range of public expenditure
shares in relation to GDP. Also changing the initial stock of human capital, the
production function of human capital or preferences with regard to utility leave
the qualitative conclusions unchanged. As reported in Table 4, reducing the ini-
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