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Tax Reform, Consumption Habit, and Capital Accumulation

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  • Ronald Wendner

Abstract

This paper investigates the impact of tax reforms on capital accumulation and welfare in both a model without habits (benchmark model) and a model with habits. In the benchmark model, the examined tax reforms generally lead to higher welfare. In contrast, in the model with habits the same tax changes may imply lower levels of welfare (efficiency). The paper highlights the danger that policy analysis not taking account of habits may fail to predict the correct mathematical sign of the impact of tax reform on savings, growth, and welfare.

Suggested Citation

  • Ronald Wendner, 2004. "Tax Reform, Consumption Habit, and Capital Accumulation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 462-462, December.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200412)60:4_462:trchac_2.0.tx_2-i
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    More about this item

    Keywords

    tax reform; habit formation; capital accumulation; welfare;

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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