The Consumption Tax and the Saving Elasticity

Laurence S. Seidman and Kenneth A. Lewis

National Tax Journal, 1999, vol. 52, issue 1, 67-78

Abstract: It is often assumed that if an income tax is converted to a consumption tax, the resulting change in the capital/labor ratio of the economy depends on the saving elasticity (the response of individual saving to the interest rate). In one standard life-cycle growth model, we show that, though this is correct in the short run, it is incorrect in the long run: conversion to a consumption tax always raises the steady-state capital/labor ratio, and the increase is the same regardless of the saving elasticity (positive, zero, or negative). In this model, a particular steady state is compatible with very different saving elasticities.

Date: 1999
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