Financial Frictions and the Non-Distortionary Effects of Delayed Taxation
28 Pages Posted: 25 Feb 2021 Last revised: 17 Mar 2022
Date Written: February 23, 2021
Financially constrained agents discount future cash flows at above-market rates. In this paper, we present the hypothesis that delaying tax payments can materially reduce distortions when agents are credit constrained. We test this hypothesis in the context of the labor supply decisions of young workers in Norway, where a kinked income-contingent student-debt conversion scheme replicates an income tax with delayed payments. Bunching analyses reveal elasticities that are an order of magnitude below those we find at a regular income tax threshold, and which are increasing in ex-ante financial resources. These findings underline the potential for delayed taxation to be a powerful new component of optimal tax policy.
Keywords: deferred taxation, delayed taxation, credit constraints, income taxation, household finance
JEL Classification: H21, G51, D15
Suggested Citation: Suggested Citation