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Consumption Taxes and Economic Efficiency in a Stochastic OLG Economy

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  • Shinichi Nishiyama
  • Kent Smetters

Abstract

Fundamental tax reform is examined in a heterogeneous overlapping-generations (OLG) model in which agents face idiosyncratic earnings shocks and uncertain life spans. Following Auerbach and Kotlikoff (1987), a Lump-Sum Redistribution Authority is used to rigorously examine efficiency gains over the transition path. A progressive income tax is replaced with a flat consumption tax (for example, a value-added tax or a national retail sales tax). If shocks are insurable (that is, no risk), this reform improves (interim) efficiency, a result consistent with the previous literature. But if, more realistically, shocks are uninsurable, this reform reduces efficiency, even though national wealth and output increase over the entire transition path. This efficiency loss, in large part, stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9492.

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Date of creation: Feb 2003
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Publication status: published as Nishiyama, Shinichi and Kent Smetters. “Consumption Taxes, Risk Sharing and Economic Efficiency.” Journal of Political Economy 113, 5 (October 2005): 1088 – 1115.
Handle: RePEc:nbr:nberwo:9492

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  1. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers, Federal Reserve Bank of Minneapolis 508, Federal Reserve Bank of Minneapolis.
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  4. Alan J. Auerbach & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(1), pages 73-94, Winter.
  5. Hugett, M. & Ventura, G., 1997. "On the Distributional Effects of Social Security Reform," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 9710, University of Western Ontario, Department of Economics.
  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  7. Alan J. Auerbach & James R. Hines Jr., 2001. "Taxation and Economic Efficiency," NBER Working Papers 8181, National Bureau of Economic Research, Inc.
  8. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  9. Nancy L. Stokey & Sergio Rebelo, 1993. "Growth Effects of Flat-Rate Taxes," NBER Working Papers 4426, National Bureau of Economic Research, Inc.
  10. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, Elsevier, vol. 71(1), pages 1-26, January.
  11. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.
  12. Mariacristina De Nardi & Selahattin Imrohoroglu & Thomas J. Sargent, 1999. "Projected U.S. Demographics and Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 575-615, July.
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  1. Förespråkar OECD platt skatt för Sverige?
    by Martin Flodén in Ekonomistas on 2008-04-22 16:30:31
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Cited by:
  1. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Will China Eat Our Lunch or Take us to Dinner? - Simulating the Transition Paths of the U.S., Eu, Japan and China," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-151, Boston University - Department of Economics.
  2. Hans Fehr & Christian Habermann, 2008. "Risk Sharing and Efficiency Implications of Progressive Pension Arrangements," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 110(2), pages 419-443, 06.
  3. Yamada, Tomoaki, 2011. "A politically feasible social security reform with a two-tier structure," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 199-224, September.
  4. Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax," NBER Working Papers 11858, National Bureau of Economic Research, Inc.
  5. Yamada, Tomoaki, 2012. "Income risk, macroeconomic and demographic change, and economic inequality in Japan," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(1), pages 63-84.
  6. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China," NBER Working Papers 11668, National Bureau of Economic Research, Inc.
  7. Victor Duarte Lledo, 2005. "Tax Systems Under Fiscal Adjustment," IMF Working Papers, International Monetary Fund 05/142, International Monetary Fund.
  8. Shinichi Nishiyama, 2003. "Analyzing Tax Policy Changes Using a Stochastic OLG Model with Heterogeneous Households: Technical Paper 2003-12," Working Papers, Congressional Budget Office 15112, Congressional Budget Office.
  9. Shinichi Nishiyama, 2004. "Social Security Reform in an Economy with Population Aging," Econometric Society 2004 North American Winter Meetings, Econometric Society 582, Econometric Society.

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