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Tax Policy in a Life Cycle Model

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER)

November 1978

NBER Working Paper No. w0302

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.

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Date posted: July 5, 2004  

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

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Lawrence H. Summers (Contact Author)
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)
National Bureau of Economic Research (NBER)
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Cambridge, MA 02138
United States
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