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Temptation-Driven Behavior And Taxation: A Quantitative Analysis In A Life-Cycle Model

Author

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  • Cagri S. Kumru
  • Athanasios C. Thanopoulos

Abstract

This paper examines the impact of labor and capital income taxes in a stochastic overlapping generations (OLG) economy where agents face borrowing constraints and their behavior is temptation driven. We quantitatively establish that the existence of temptation in preferences may function as an opposing mechanism to modeling choices, such as liquidity constraints, life-cycle structure, and idiosyncratic earnings risks, that are critical in delivering a positive capital income tax rate. We show that a sufficiently large measure of individuals having self-control preferences, or alternatively, a sufficiently high cost of exercising self-control, puts downward pressure on the optimal capital income tax rate . ( JEL E21, E62, H55)

Suggested Citation

  • Cagri S. Kumru & Athanasios C. Thanopoulos, 2015. "Temptation-Driven Behavior And Taxation: A Quantitative Analysis In A Life-Cycle Model," Economic Inquiry, Western Economic Association International, vol. 53(3), pages 1470-1490, July.
    • Handle: RePEc:bla:ecinqu:v:53:y:2015:i:3:p:1470-1490
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    File URL: https://onlinelibrary.wiley.com/doi/10.1111/ecin.12170
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    Citations

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    Cited by:

    1. Maria Arvaniti & Tomas Sjögren, 2020. "Temptation in Consumption and Optimal Redistributive Taxation," CER-ETH Economics working paper series 20/339, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    2. Airaudo, Marco, 2017. "Temptation and Forward Guidance," School of Economics Working Paper Series 2017-4, LeBow College of Business, Drexel University.
    3. Momota, Akira & Sakagami, Tomoya & Shibata, Akihisa, 2019. "Reexamination of the Serendipity Theorem from the stability viewpoint," Journal of Demographic Economics, Cambridge University Press, vol. 85(1), pages 43-70, March.
    4. Arvaniti, Maria & Sjögren, Tomas, 2023. "Temptation in consumption and optimal taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 687-707.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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