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The Timing of Intergenerational Transfers, Tax Policy, and Aggregate Savings

  • David Altig
  • Steve J. Davis

We analyze the interest rate and savings effects of fiscal policy in an overlapping generations framework that accommodates two observations: (1) The interest rate on consumption loans exceeds the rate of return to household savings. (2) Private intergenerational transfers are widespread and primarily occur early in the lifecycle of recipients. The wedge between borrowing and lending rates in our model arises from the asymmetric tax treatment of interest income and interest payments. Intergenerational transfers are altruistically motivated. Under the assumption that altruistic transfers occur in at least some family lines and other plausible conditions, we prove the invariance of capital's steady-state marginal product to government expenditures, government debt, the labor income tax schedule, and the tax rate on capital income. In contrast, we find that the tax treatment of interest payments has powerful effects on capitals? marginal product and aggregate savings in life-cycle and, especially, altruistic linkage models. Our theoretical analysis also generates new testable implications for empirical work on how tax policy effects aggregate savings and on the connection between the age distribution of resources and the age distribution of consumption. Simulations of our model suggest that the 1986 Tax Reform Act's elimination of interest deductibility on consumer loan repayments will significantly increase per capita savings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3753.

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Date of creation: Jun 1991
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Publication status: published as American Economic Review December 1992, Volume 82, No. 5
Handle: RePEc:nbr:nberwo:3753
Note: PE
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  1. Modigliani, Franco, 1988. "The Role of Intergenerational Transfers and Life Cycle Saving in the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 15-40, Spring.
  2. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
  3. Laurence J. Kotlikoff & Lawrence H. Summers, 1980. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc.
  4. Glenn B. Canner & Charles A. Luckett, 1989. "Home equity lending," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May, pages 333-344.
  5. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
  6. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  7. Laurence J. Kotlikoff, 1987. "Intergenerational Transfers and Savings," NBER Working Papers 2237, National Bureau of Economic Research, Inc.
  8. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-38, April.
  9. David Altig & Steve J. Davis, 1991. "Borrowing Constraints and Two-Sided Altruism With an Application to Social Security," NBER Working Papers 3913, National Bureau of Economic Research, Inc.
  10. Lawrence H. Summers, 1982. "Tax Policy, the Rate of Return, and Savings," NBER Working Papers 0995, National Bureau of Economic Research, Inc.
  11. Altig, David & Davis, Steve J., 1989. "Government debt, redistributive fiscal policies, and the interaction between borrowing constraints and intergenerational altrusim," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 3-29, July.
  12. Boskin, Michael J. & Kotlikoff, Laurence J., 1985. "Public debt and United States saving: A new test of the neutrality hypothesis," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 55-86, January.
  13. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1992. "Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data," American Economic Review, American Economic Association, vol. 82(5), pages 1177-98, December.
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