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Self-control Preferences and Taxation: A Quantitative Analysis in a Life Cycle Model

  • Cagri S. Kumru

    ()

  • Athanasios C. Thanopoulos

This paper examines the impact of various .fiscal policies, namely, taxes on consumption, lab and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard. We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. Given there is strong empirical and experimental evidence regarding the existence of self-control problems, our model provides quite an interesting insight: as agents.self-control costs rise, the optimal capital income tax rate will converge to Chamley and Judd value.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-546.

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Length: 28 Pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:acb:cbeeco:2011-546
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