Tax Policy in a Life Cycle Model

Lawrence Summers

No 302, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study departs from earlier analyses of the effects of taxes on capital income in several respects. Probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving. It is shown below that the common two-period formulation of saving decisions yields quite misleading results. A more realistic model of life cycle savings demonstrates that, for a wide variety of plausible parameter values, savings are very interest elastic. This implies that shifting away from capital income taxation would significantly increase capital formation, making possible long-run increases in consumption.

Date: 1978-11
Note: PE
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Published as Summers, Lawrence H. "Capital Taxation and Accumulation in a Life Cycle Growth Model." The American Economic Review, Vol. 71, No. 4, (September 1981),pp. 533-544.

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