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

Cagri Kumru () and Athanasios Thanopoulos
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Athanasios Thanopoulos: Council of Economic Advisers of the Government of Greece, Ministry of Finance, Greece

No 201122, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: This paper examines the impact of various fiscal policies, namely, taxes on consumption, labor 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)
Date: 2011-09
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