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

Cagri Kumru and Athanasios C. Thanopoulos

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: 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.

JEL-codes: E21 E62 H55 (search for similar items in EconPapers)
Pages: 28 Pages
Date: 2011-06
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https://www.cbe.anu.edu.au/researchpapers/econ/wp546.pdf (application/pdf)

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Working Paper: Self-control Preferences and Taxation: A Quantitative Analysis in a Life-cycle Model (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2011-546

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