Consumption Taxes and Economic Efficiency in a Stochastic OLG Economy: Technical Paper 2002-6

Shinichi Nishiyama (nishiyama@econ.kyoto-u.ac.jp) and Kent Smetters

No 14229, Working Papers from Congressional Budget Office

Abstract: Fundamental tax reform is examined in a heterogeneous overlapping-generations life-cycle model in which agents face idiosyncratic earnings shocks and uncertain life spans. Following Auerbach and Kotlikoff (1987), a lump-sum redistribution authority is used to examine efficiency gains over the transition path. A progressive income tax is replaced with a flat consumption tax (for example, a value-added tax or a national retail sales tax). If shocks are insurable (that is, no risk), this reform improves (interim) efficiency, a result consistent with the previous literature.

Date: 2002-12-02
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