Tax Policy in a Life Cycle Model

12 Pages Posted: 5 Jul 2004  

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: November 1978

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.

Suggested Citation

Summers, Lawrence H., Tax Policy in a Life Cycle Model (November 1978). NBER Working Paper No. w0302. Available at SSRN: https://ssrn.com/abstract=260488

Lawrence H. Summers (Contact Author)

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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