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The Later You Pay, the Higher the k

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  • Laurence S. Seidman
  • Kenneth A. Lewis

Abstract

This paper shows the importance of the age path (life‐cycle timing) of any tax for the accumulation of capital in the economy. Income, consumption, and wage taxes differ in their age paths as well as their incentive effects. This paper studies how the differing age path of each tax affects the capital accumulation of the economy in an empirically calibrated life‐cycle model. We investigate lump‐sum “age” taxes and find in every case that the later the person pays tax, the higher the k of the economy. To analyze the life‐cycle timing effect of conventional transactions‐based taxes (income, consumption, and wage), we replace each tax with a lump‐sum age tax that has the identical age path of tax payments over the life cycle. We find that the timing effect is quantitatively important and often causes the impact of a tax on capital accumulation to be very different from what would be predicted from the incentive effect.

Suggested Citation

  • Laurence S. Seidman & Kenneth A. Lewis, 2003. "The Later You Pay, the Higher the k," Southern Economic Journal, John Wiley & Sons, vol. 69(3), pages 560-577, January.
    • Handle: RePEc:wly:soecon:v:69:y:2003:i:3:p:560-577
    DOI: 10.1002/j.2325-8012.2003.tb00513.x
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    References listed on IDEAS

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    Cited by:

    1. Alan D. Viard, 2007. "The Welfare Effects Of Pay‐As‐You‐Go Retirement Programs: The Role Of Tax And Benefit Timing," Contemporary Economic Policy, Western Economic Association International, vol. 25(2), pages 282-292, April.

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