Risky Taxes, Budget Balance Preserving Spreads and Precautionary Savings
AbstractThe paper analyzes the effects on consumption from changes in the riskiness of taxes. It starts by reinterpreting the Sandmo  paper on general capital income risk to the case of risky capital taxation. In his framework the concept of a mean preserving spread (MPS) is used for the risk analysis. In connection with risky taxes it is however possible to explicitly connect the tax risk with the government's budget constraint. In this paper the concept of a budget balance preserving spread (BBPS) is developed and used for the analysis of stochastic taxes. The paper is concluded with a comparison of the effects that a MPS and a BBPS has on consumption decisions. It is shown that the comparative statics results for a BBPS could be different from the results obtained with a MPS.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 73.
Length: 32 pages
Date of creation: Oct 1995
Date of revision:
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More information through EDIRC
Tax risk; precautionary savings;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
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