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Dynamic Tax Incidence in a Finite Horizon Model

Listed author(s):
  • Itaya, Jun-Ichi

This paper reexamines the problem of long-run tax incidence by using a two-sector growth model in which finitely-lived individuals undertake intertemporal optimizing decisions in the presence of annuity markets. Under a constant relative risk aversion utility function, none of the selective taxes imposed on the consumption goods sector are neutral with respect to the long-run wage/profit ratio even if labor supply is fixed. This result differs significantly both from that of the infinite horizon model and of Summers' life cycle, overlapping generations model. Neutrality emerges if and only if the birth rate is equal to zero. The larger is the birth rate, the weaker is the intertemporal substitution effect. Without annuity markets, neutrality arises again if and only if the birth rate equals the death rate.

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Article provided by in its journal Public Finance = Finances publiques.

Volume (Year): 50 (1995)
Issue (Month): 2 ()
Pages: 246-266

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Handle: RePEc:pfi:pubfin:v:50:y:1995:i:2:p:246-66
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