This paper analyzes the ways in which substituting a consumption tax for the existing personal and corporate income taxes would affect equilibrium pretax interest rates. The analysis indicates that whether the pretax rate of interest rises or falls depends on the strength of the personal saving response, the nature of the capital market equilibrium between debt and equity yields, and the response of the owner-occupied housing sector. A formal two-sector model with endogenous saving, housing and corporate capital is presented. With plausible parameter values, the analysis suggests that the shift from an income tax to a consumption tax is more likely to raise rates than to lower them.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5397.
Length: Date of creation: Dec 1995 Date of revision: Handle: RePEc:nbr:nberwo:5397
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Find related papers by JEL classification: H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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