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A General Equilibrium Model of Taxation with Endogenous Financial Behavior

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  • Joel Slemrod

Abstract

This paper presents and utilizes a new general equilibrium simulation model of capital income taxation. Its chief advantage over existing models of the effects of taxation is that it recognizes that agents may adjust their financial behavior in response to changes in the way that capital income is taxed. By integrating a structural treatment of portfolio choice and financial markets into a standard multi-sector model of taxation, the model can trace the general equilibrium impact of these financial adjustments and calculate the tax-induced changes in the allocation of factors and output as well as the distributional effects of any tax change. The model is used to simulate the impact of completely indexing the tax system for inflation. The results indicate there would be significant financial adjustment in response to indexing. A large shift in the distribution of private risk bearing accompanies a slight reallocation of the capital stock away from owner-occupied housing toward its other uses and a substantial change in the ownership of the housing stock by income class. All in all, indexing the tax system of an economy like the U.S. in 1977 seems to lead to an efficiency gain, slightly hurts the lowest income classes, and substantially improves the welfare of the highest income groups. The simulation results should, however, be considered tentative due to uncertainty about the values of several parameters and the relatively simple formulations of the determinants of portfolio choice and the U.S. financial structure.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0799.

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Date of creation: Nov 1981
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Publication status: published as Slemrod, Joel. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior." Chapter 12 in Behavioral Simulation Methods in Tax Policy Analysis, edited by Martin Feldstein. Chicago: University of Chicago Press, (1983).
Handle: RePEc:nbr:nberwo:0799

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  1. Alan J. Auerbach & Mervyn A. King, 1984. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
  2. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1983. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 44-60 National Bureau of Economic Research, Inc.
  3. McLure, Charles Jr., 1975. "General equilibrium incidence analysis : The Harberger model after ten years," Journal of Public Economics, Elsevier, Elsevier, vol. 4(2), pages 125-161, February.
  4. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
  5. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
  6. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
  7. Feldstein, Martin S & Slemrod, Joel, 1980. "Personal Taxation, Portfolio Choice, and the Effect of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 854-66, October.
  8. Shoven, John B. & Whalley, John, 1972. "A general equilibrium calculation of the effects of differential taxation of income from capital in the U.S," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 281-321, November.
  9. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Replacing the Personal Income Tax with a Progressive Consumption Tax," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 171-187 National Bureau of Economic Research, Inc.
  10. Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 116-152 National Bureau of Economic Research, Inc.
  11. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1261-83, December.
  12. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  13. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
  14. Irwin Friend & Joel Hasbrouck, . "Effect of Inflation on the Profitability and Valuation of U.S. Corporations," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 13-80, Wharton School Rodney L. White Center for Financial Research.
  15. Rosen, Harvey S & Rosen, Kenneth T, 1980. "Federal Taxes and Homeownership: Evidence from Time Series," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 59-75, February.
  16. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  17. Joseph E. Stiglitz, 1970. "Taxation, Risk-Taking, and the Allocation of Investment," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 305, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Roger H. Gordon & Wei Li, 1999. "Government as a Discriminating Monopolist in the Financial Market: The Case of China," NBER Working Papers 7110, National Bureau of Economic Research, Inc.
  2. Boyd, Roy & Ibarraran, Maria E., 2002. "Costs of compliance with the Kyoto Protocol: a developing country perspective," Energy Economics, Elsevier, Elsevier, vol. 24(1), pages 21-39, January.
  3. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
  4. Fullerton, Don & Karayannis, Marios, 1994. "Tax evasion and the allocation of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 55(2), pages 257-278, October.
  5. Gordon, Roger H & Wilson, John Douglas, 1989. "Measuring the Efficiency Cost of Taxing Risky Capital Income," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 427-39, June.
  6. Joel Slemrod, 1984. "A General Equilibrium Model of Taxation That Uses Micro-Unit Data: Withan Application to the Impact of Instituting a Flat-Rate Income Tax," NBER Working Papers 1461, National Bureau of Economic Research, Inc.
  7. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
  8. Pierre-Yves Letournel & Katheline Schubert, 1991. "Un modèle d'équilibre général appliqué à l'étude de la fiscalité française," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 98(2), pages 83-99.
  9. Michael Haliassos & Andrew B. Lyon, 1993. "Progressivity of Capital Gains Taxation with Optimal Portfolio Selection," NBER Working Papers 4253, National Bureau of Economic Research, Inc.
  10. Klepper, Gernot & Lorz, Jens Oliver & Stähler, Frank & Thiele, Rainer & Wiebelt, Manfred, 1993. "Empirische allgemeine Gleichgewichts-Modelle: Struktur und Anwendungsmöglichkeiten," Kiel Working Papers 595, Kiel Institute for the World Economy.
  11. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1985. "Long-run Effects of the Accelerated Cost Recovery System," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 363-72, August.
  12. James M. Poterba, 1990. "Taxation and Housing Markets: Preliminary Evidence on the Effects of Recent Tax Reforms," NBER Working Papers 3270, National Bureau of Economic Research, Inc.

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