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Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty

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  • Sanjit Dhami

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Abstract

A representative individual lives for two periods; works when young and depends on savings and a government operated social security system when old—the returns on both sources of income, when old, are random. Due to administrative problems the returns to savings are observed with some measurement error. Two alternative consumption tax systems are considered; the Registered Asset Treatment (RAT) and the Non-Registered Asset Treatment (NRAT). The advantage of the RAT is that it can perform a “social insurance role” while the disadvantage is that it imposes “measurement error risk.” Correlation between the random return on saving and its measurement error can provide a “risk-hedging role” that can be further strengthened by the RAT version. The NRAT version neither provides “social insurance” nor imposes “measurement error risk.” Both tax systems hedge against the uncertainties in the social security system. The taxpayer engages in precautionary saving in response to future uncertainty. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1020959013337
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 9 (2002)
Issue (Month): 6 (November)
Pages: 673-685

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Handle: RePEc:kap:itaxpf:v:9:y:2002:i:6:p:673-685

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: income uncertainty; measurement problems; risk-hedging;

References

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  1. Mirrlees, J A, 1990. "Taxing Uncertain Incomes," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 34-45, January.
  2. Burgess, Robin & Stern, Nicholas, 1993. "Taxation and Development," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 762-830, June.
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  4. Zodrow, George R., 1995. "Taxation, uncertainty and the choice of a consumption tax base," Journal of Public Economics, Elsevier, vol. 58(2), pages 257-265, October.
  5. Eaton, Jonathan & Rosen, Harvey S, 1980. "Optimal Redistributive Taxation and Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 357-64, September.
  6. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty and optimal taxation: In defense of commodity taxes," Journal of Public Economics, Elsevier, vol. 56(2), pages 291-310, February.
  7. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  8. Chris Heady, 1993. "Optimal taxation as a guide to tax policy: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(1), pages 15-41, February.
  9. Robin Boadway & David Wildasin, 1994. "Taxation and savings: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 15(3), pages 19-63, August.
  10. Joel Slemrod, 1991. "Optimal Taxation and Optimal Tax Systems," NBER Working Papers 3038, National Bureau of Economic Research, Inc.
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Cited by:
  1. Thomas Eichner & Andreas Wagener, 2004. "The Welfare State in a Changing Environment," International Tax and Public Finance, Springer, vol. 11(3), pages 313-331, 05.

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