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Tax Policy in a Life Cycle Model

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  • Lawrence H. Summers

Abstract

This study departs from earlier analyses of the effects of taxes on capital income in several respects. Probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving. It is shown below that the common two-period formulation of saving decisions yields quite misleading results. A more realistic model of life cycle savings demonstrates that, for a wide variety of plausible parameter values, savings are very interest elastic. This implies that shifting away from capital income taxation would significantly increase capital formation, making possible long-run increases in consumption.

Suggested Citation

  • Lawrence H. Summers, 1978. "Tax Policy in a Life Cycle Model," NBER Working Papers 0302, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0302
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    References listed on IDEAS

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    1. M. S. Feldstein & S. C. Tsiang, 1968. "The Interest Rate, Taxation, and the Personal Savings Incentive," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 419-434.
    2. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
    3. Martin Feldstein & Jerry Green & Eytan Sheshinski, 1983. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 44-60 National Bureau of Economic Research, Inc.
    4. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    5. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-516, June.
    6. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    7. Laurence J. Kotlikoff & Lawrence H. Summers, 1979. "Tax Incidence in a Life Cycle Model with Variable Labor Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 705-718.
    8. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
    2. Driffill, E John & Rosen, Harvey S, 1983. "Taxation and Excess Burden: A Life Cycle Perspective," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 671-683, October.
    3. Martin S. Feldstein & Daniel R. Feenberg, 1983. "Alternative Tax Rules and Personal Saving Incentives: Microeconomic Data and Behavioral Simulations," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 173-210 National Bureau of Economic Research, Inc.
    4. Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 116-152 National Bureau of Economic Research, Inc.
    5. Feldstein, Martin, 1980. "Tax Rules and the Mismanagment of Monetary Policy," American Economic Review, American Economic Association, vol. 70(2), pages 182-186, May.
    6. Fischer Black, 1981. "When Is a Positive Income Tax Optimal?," NBER Working Papers 0631, National Bureau of Economic Research, Inc.
    7. Charles Becker & Don Fullerton, 1980. "Income Tax Incentives to Promote Saving," NBER Working Papers 0487, National Bureau of Economic Research, Inc.

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