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The Consumption Tax and the Saving Elasticity

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  • Seidman, Laurence S.
  • Lewis, Kenneth A.

Abstract

It is often assumed that if an income tax is converted to a consumption tax, the resulting change in the capital/labor ratio of the economy depends on the saving elasticity (the response of individual saving to the interest rate). In one standard life-cycle growth model, we show that, though this is correct in the short run, it is incorrect in the long run: conversion to a consumption tax always raises the steady-state capital/labor ratio, and the increase is the same regardless of the saving elasticity (positive, zero, or negative). In this model, a particular steady state is compatible with very different saving elasticities.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 52 (1999)
Issue (Month): n. 1 (March)
Pages: 67-78

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Handle: RePEc:ntj:journl:v:52:y:1999:i:n._1:p:67-78

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Cited by:
  1. Laurence Seidman, 2014. "Overcoming The Fiscal Trilemma With Two Progressive Consumption Tax Supplements," Working Papers, University of Delaware, Department of Economics 14-04, University of Delaware, Department of Economics.
  2. Kenneth A. Lewis & Laurence S. Seidman, 2002. "Funding Social Security: The Transition in a Life-Cycle Growth Model," Eastern Economic Journal, Eastern Economic Association, Eastern Economic Association, vol. 28(2), pages 159-180, Spring.
  3. James Alm & Asmaa El-Ganainy, 2013. "Value-added taxation and consumption," International Tax and Public Finance, Springer, Springer, vol. 20(1), pages 105-128, February.
  4. Lewis, Kenneth A. & Seidman, Laurence S., 2001. "The Consumption Tax and Transitional Relief," Journal of Macroeconomics, Elsevier, Elsevier, vol. 23(1), pages 99-120, January.
  5. Patrick A. Imam, 2013. "Shock from Graying," IMF Working Papers, International Monetary Fund 13/191, International Monetary Fund.

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