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Economic Theory and Tax and Pension Policies


  • This is a combined and expanded version of the Walsh Lecture in honour of Henry George given at ACE 10, the 39th Australian Conference of Economists, Sydney, 29 September 2010, and a Guest Lecture given at the Treasury, Wellington, 5 October 2010. The author is grateful to Nick Barr, Hazel Bateman, Tim Hampton, Nicola Kirkup, Philip Meguire, Alison O’Connell, Mike Rafferty and Christie Smith for guidance on their countries’ pension systems and helpful comments on a previous draft.

Peter Diamond, MIT Department of Economics, 50 Memorial Drive, Building E52, Room 344, Cambridge, MA 02142-1347, USA. Email:


Studying and advising about mandatory pension systems while also researching optimal tax theory, with particular attention to the taxation of capital income, brought attention to differences in both analyses and policies, while these two subjects intersect in the common practice of the tax-favouring of retirement savings. I have long been concerned about the implicit methodology used by the profession in going from theoretical analyses to policy advice. In this essay, I touch on all four of these topics – pensions, capital income taxes, tax-favoured retirement savings and methodology. I give particular attention to the pension systems in Australia and New Zealand.