Interest rates on government debt have been falling in many countries for the last several decades, with markets indicating that rates may stay low well into the future. The recent economic crisis precipitated by the coronavirus only accentuates these trends. As discussed by several authors, sustained low interest rates fundamentally change the nature of long-run fiscal policy choices.
In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. Several significant issues in tax policy are affected by the presence of sustained low interest rates. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) generally mute the value of traditional tax preferences for business investment, retirement saving, and capital gains, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.