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General Equilibrium Tax Policy with Hyperbolic Consumers

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  • Toke Ward Petersen
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    Abstract

    Recently David Laibson (1998) and others have argued in favor of using hyperbolic discount functions. The purpose of this paper is to investigate whether conventional wisdom, based on the standard model with exponential discounting, also holds in the case where consumers have hyperbolic discount functions. In other words do hyperbolic preferences matter for practical policy evaluation? Within the framework of a suitably modified standard General Equilibrium model a la Auerbach and Kotlikoff (1987), this is done by simulations of both fundamental changes in the tax base, as well as more marginal experiments comparing the excess burden of taxation. Based on the simulations it turns out that the answer to the question is a maybe: if preferences are sufficiently hyperbolic then policy conclusions change. Unfortunately this degree of hyperbolicness in the discounting function is at the level that is considered realistic by empirical studies.

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 189.

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    Date of creation: 01 Apr 2001
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    Handle: RePEc:sce:scecf1:189

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    Keywords: hyperbolic discounting; tax reform;

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