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The Later You Pay, the Higher the k

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  • Laurence S. Seidman

    ()
    (Department of Economics, University of Delaware)

  • Kenneth A. Lewis

    ()
    (Department of Economics, University of Delaware)

Abstract

This paper shows the importance of the age path (life-cycle timing) of any tax for the accumulation of capital in the economy. Income, consumption, and wage taxes differ in their age paths as well as their incentive effects. This paper studies how the differing age path of each tax affects the capital accumulation of the economy in an empirically calibrated life-cycle model. We investigate lump-sum “age” taxes and find in every case that the later the person pays tax, the higher the k of the economy. To analyze the life-cycle timing effect of conventional transactions-based taxes (income, consumption, and wage), we replace each tax with a lump-sum age tax that has the identical age path of tax payments over the life cycle. We find that the timing effect is quantitatively important and often causes the impact of a tax on capital accumulation to be very different from what would be predicted from the incentive effect.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 69 (2003)
Issue (Month): 3 (January)
Pages: 560-577

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Handle: RePEc:sej:ancoec:v:69:3:y:2003:p:560-577

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Alan D. Viard, 2006. "The welfare effects of pay-as-you-go retirement programs: the role of tax and benefit timing," Working Papers 0602, Federal Reserve Bank of Dallas.

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