New tax policy boosts economy and individual welfare in overlapping generations.
In an economy where people can only save in terms of capital, a balanced fiscal policy can improve upon the competitive equilibrium without needing intergenerational transfers. By taxing or subsidizing capital returns and balancing the budget through lump-sum transfers, each generation can achieve the highest utility possible through existing markets. This intervention can lead to a better outcome for all generations, especially if the economy is dynamically inefficient or if the output-to-capital elasticity is high.