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Savings and Taxation

  • Mervyn A. King
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    In section 1.2 we shall examine the optimal taxation of capital and labor incomes in a simple growth model and derive formulae for the optimal tax rates. These are used in section 1.3 to evaluate claims that abolishing capital income taxes would lead to large welfare gains. Inflation is introduced in section 1.4, and alternative approaches to modeling savings behavior are discussed in section 1.5. Finally, we shall look briefly at some of the empirical evidence on the effects of taxes on savings. Our analysis will be highly simplified. We shall ignore many of the issues stressed by the Meade Committee, such as the complex interaction between personal and corporate taxation, the sheer diversity of tax rates currently imposed on different forms of saving, and the portfolio aspects of personal saving. The relationship between expenditure on durables and saving and the effect of social security on consumption will also be left to one side, and we shall say little about the production side of the economy. (For surveys of the effects of taxes on investment, see Helliwell, 1976; King, 1977; and von Furstenberg and Malkiel, 1977.) Despite these omissions the model captures the essential features necessary to an evaluation of the efficiency arguments.

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    File URL: http://www.nber.org/papers/w0428.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0428.

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    Date of creation: Jan 1980
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    Publication status: published as King, Mervyn A. "Saving and Taxation." Public Policy and the Tax System, edited by G.A. Hughes And G.M. Heal, pp. 1-35. London: George Allen & Unwin, 1980.
    Handle: RePEc:nbr:nberwo:0428
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    1. Feldstein, Martin S, 1978. "The Rate of Return, Taxation and Personal Savings," Economic Journal, Royal Economic Society, vol. 88(351), pages 482-87, September.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    3. Diewert, W E, 1974. "Intertemporal Consumer Theory and the Demand for Durables," Econometrica, Econometric Society, vol. 42(3), pages 497-516, May.
    4. Eytan Sheshinski, 1977. "A Model of Social Security and Retirement Decisions," NBER Working Papers 0187, National Bureau of Economic Research, Inc.
    5. 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.
    6. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," Review of Economic Studies, Oxford University Press, vol. 21(1), pages 21-30.
    7. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    8. Feldstein, Martin S, 1970. "Inflation, Specification Bias, and the Impact of Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 78(6), pages 1325-39, Nov.-Dec..
    9. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
    10. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    11. Berndt, Ernst R & Darrough, Masako N & Diewert, W E, 1977. "Flexible Functional Forms and Expenditure Distributions: An Application to Canadian Consumer Demand Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 651-75, October.
    12. Ordover, Janusz A. & Phelps, Edmund S., 1979. "On the Concept of Optimal Taxation in an Overlapping-Generations Model of Efficient Growth," Working Papers 79-09, C.V. Starr Center for Applied Economics, New York University.
    13. von Furstenberg, George M & Malkiel, Burton G, 1977. "The Government and Capital Formation: A Survey of Recent Issues," Journal of Economic Literature, American Economic Association, vol. 15(3), pages 835-78, September.
    14. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
    15. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
    16. John Wesson, 1972. "On the Distribution of Personal Incomes," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 77-86.
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