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Self-control Preferences and Taxation: A Quantitative Analysis in a Life-cycle Model

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  • Cagri Seda Kumru

    ()
    (Research School of Economics, The Australian National University and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)

  • Athanasios C. Thanopoulos

    (Council of Economic Advisers of the Government of Greece, Ministry of Finance, Greece)

Abstract

This paper examines the impact of various fiscal policies, namely, taxes on consumption, labor and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard. We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. Given there is strong empirical and experimental evidence regarding the existence of self-control problems, our model provides quite an interesting insight: as agents' self-control costs rise, the optimal capital income tax rate will converge to Chamley and Judd value.

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File URL: http://cepar.edu.au/media/80149/self-control_preferences_and_taxation.pdf
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Bibliographic Info

Paper provided by ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales in its series Working Papers with number 201122.

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Length: 30 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:asb:wpaper:201122

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  8. Cagri S. Kumru & Athanasios C. Thanopoulos, 2010. "Social Security Reform with Self-Control Preferences," Discussion Papers 2010-11, School of Economics, The University of New South Wales.
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