Generational Accounting

Business, Legal & Accounting Glossary

Definition: Generational Accounting




Full Definition of Generational Accounting


Generational accounting is a kind of accounting method. It studies how the present fiscal policies of a country affect its coming generations. Pioneers in the field of generational accounting include names like Laurence Kotlikoff, Jagadeesh Gokhalea and Alan Auerbach. It analyzes government spending components and tax programs with a view to determine whether benefit accruing to present generation is leading to any unfair tax burden for future generations of a country. Generational accounting is carried out with a view to attaining generational balance. Generational balance is maintained when present and future generations of a country face equivalent ‘lifetime net tax rates’. Fulfilment of this condition is a prerequisite for the maintenance of a nation’s fiscal sustainability. This implies that a country’s fiscal policy and tax programs need to be fine-tuned for attaining the goal of fiscal sustainability. Idea is to avoid tax imposition without representation. For instance, expenditure on retirement programs for senior citizens has to be funded by younger generations. Generational accounting aims at the elimination of government policies, which adversely affect the interest of future generations.

Basic Generational Accounting Steps

  • Estimation of future net taxes payable by all living generations, over their remaining lifespan
  • Estimation of the present value of commodities and services that will be purchased by the concerned government in future
  • Calculation of present value of future generation’s future net taxes
  • Estimation of the lifetime rate of net tax for all generations. (Net tax values and each generation’s lifetime labour income are used here)

Generational Accounting Critique

Experts have pointed out some drawbacks of generational accounting as a policy analytical tool. Some of them are mentioned below.

  • Generational accounting is not easily comprehensible
  • Issues like an estimation of transfers and taxes depend on the availability of data
  • Future budget projections are dependent on various policy, economic and demographic assumptions, which are considered to be controversial at times
  • Generational accounting precludes general equilibrium feedback
  • Determination of accurate discount rate for calculation of present values is subject to controversies

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Definition Sources


Definitions for Generational Accounting are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 27th March, 2020 | 0 Views.