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Taxation when Borrowing is Costly

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  • JOHN QUIGGIN

Abstract

The implications for taxation theory of a life‐cycle model of consumption incorporating financial transactions costs are derived The equity case for progressive taxation is shown to correspond in a life‐cycle setting, to an efficiency case. Individuals prefer a progressive tax system to a proportional one because the tax burden is lower when they are young and face high transactions costs of borrowing. Similarly, an income tax is preferred to a consumption tax. Unlike earlier models based on liquidity constraints, the model presented here involves a financial sector consuming real resources. This permits analysis of the tax treatment of financial services in a consumption tax system. Exemption of financial services will generally be desirable.

Suggested Citation

  • John Quiggin, 1993. "Taxation when Borrowing is Costly," The Economic Record, The Economic Society of Australia, vol. 69(4), pages 416-427, December.
  • Handle: RePEc:bla:ecorec:v:69:y:1993:i:4:p:416-427
    DOI: 10.1111/j.1475-4932.1993.tb02123.x
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    References listed on IDEAS

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    1. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70(3), pages 215-215.
    2. T. J. Wales & A. D. Woodland, 1979. "Labour Supply and Progressive Taxes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(1), pages 83-95.
    3. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Correa, Juan & Lorca, Miguel & Parro, Francisco, 2015. "Measuring the Impact of Financial Taxation on Capital," MPRA Paper 64378, University Library of Munich, Germany.

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