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A General Equilibrium Model of Taxation with Endogenous Financial Behavior

In: Behavioral Simulation Methods in Tax Policy Analysis

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  • Joel B. Slemrod

Abstract

This paper presents and utilizes a new general equilibrium simulation model of capital income taxation. Its chief advantage over existing models of the effects of taxation is that it recognizes that agents may adjust their financial behavior in response to changes in the way that capital income is taxed. By integrating a structural treatment of portfolio choice and financial markets into a standard multi-sector model of taxation, the model can trace the general equilibrium impact of these financial adjustments and calculate the tax-induced changes in the allocation of factors and output as well as the distributional effects of any tax change. The model is used to simulate the impact of completely indexing the tax system for inflation. The results indicate there would be significant financial adjustment in response to indexing. A large shift in the distribution of private risk bearing accompanies a slight reallocation of the capital stock away from owner-occupied housing toward its other uses and a substantial change in the ownership of the housing stock by income class. All in all, indexing the tax system of an economy like the U.S. in 1977 seems to lead to an efficiency gain, slightly hurts the lowest income classes, and substantially improves the welfare of the highest income groups. The simulation results should, however, be considered tentative due to uncertainty about the values of several parameters and the relatively simple formulations of the determinants of portfolio choice and the U.S. financial structure.
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Suggested Citation

  • Joel B. Slemrod, 1983. "A General Equilibrium Model of Taxation with Endogenous Financial Behavior," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 427-458 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:7715
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    Cited by:

    1. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
    2. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
    3. Gordon, Roger H & Wilson, John Douglas, 1989. "Measuring the Efficiency Cost of Taxing Risky Capital Income," American Economic Review, American Economic Association, pages 427-439.
    4. James M. Poterba, 1990. "Taxation and Housing Markets: Preliminary Evidence on the Effects of Recent Tax Reforms," NBER Working Papers 3270, National Bureau of Economic Research, Inc.
    5. Joel Slemrod, 1984. "A General Equilibrium Model of Taxation That Uses Micro-Unit Data: Withan Application to the Impact of Instituting a Flat-Rate Income Tax," NBER Working Papers 1461, National Bureau of Economic Research, Inc.
    6. Fullerton, Don & Karayannis, Marios, 1994. "Tax evasion and the allocation of capital," Journal of Public Economics, Elsevier, pages 257-278.
    7. Katheline Schubert & Pierre-Yves Letournel, 1991. "Un modèle d'équilibre général appliqué à l'étude de la fiscalité française," Économie et Prévision, Programme National Persée, vol. 98(2), pages 83-99.
    8. Klepper, Gernot & Lorz, Jens Oliver & Stähler, Frank & Thiele, Rainer & Wiebelt, Manfred, 1993. "Empirische allgemeine Gleichgewichts-Modelle: Struktur und Anwendungsmöglichkeiten," Kiel Working Papers 595, Kiel Institute for the World Economy (IfW).
    9. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1985. "Long-run Effects of the Accelerated Cost Recovery System," The Review of Economics and Statistics, MIT Press, pages 363-372.
    10. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, pages 283-312.
    11. World Bank, 2001. "Mexico Energy Environment Review," World Bank Other Operational Studies 20297, The World Bank.
    12. Pierre-Yves Letournel & Katheline Schubert & Philippe Trainar, 1992. "L'utilisation des modèles d'équilibre général calculables dans l'évaluation de la politique fiscale," Revue Économique, Programme National Persée, vol. 43(4), pages 709-724.
    13. Michael Haliassos & Andrew B. Lyon, 1993. "Progressivity of Capital Gains Taxation with Optimal Portfolio Selection," NBER Working Papers 4253, National Bureau of Economic Research, Inc.
    14. Boyd, Roy & Ibarraran, Maria E., 2002. "Costs of compliance with the Kyoto Protocol: a developing country perspective," Energy Economics, Elsevier, pages 21-39.

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