Temptation‐Driven Behavior and Taxation: A Quantitative Analysis in a Life‐Cycle Model
CS Kumru, AC Thanopoulos - Economic Inquiry, 2015 - Wiley Online Library
CS Kumru, AC Thanopoulos
Economic Inquiry, 2015•Wiley Online LibraryThis paper examines the impact of labor and capital income taxes in a stochastic
overlapping generations (OLG) economy where agents face borrowing constraints and their
behavior is temptation driven. We quantitatively establish that the existence of temptation in
preferences may function as an opposing mechanism to modeling choices, such as liquidity
constraints, life‐cycle structure, and idiosyncratic earnings risks, that are critical in delivering
a positive capital income tax rate. We show that a sufficiently large measure of individuals …
overlapping generations (OLG) economy where agents face borrowing constraints and their
behavior is temptation driven. We quantitatively establish that the existence of temptation in
preferences may function as an opposing mechanism to modeling choices, such as liquidity
constraints, life‐cycle structure, and idiosyncratic earnings risks, that are critical in delivering
a positive capital income tax rate. We show that a sufficiently large measure of individuals …
This paper examines the impact of labor and capital income taxes in a stochastic overlapping generations (OLG) economy where agents face borrowing constraints and their behavior is temptation driven. We quantitatively establish that the existence of temptation in preferences may function as an opposing mechanism to modeling choices, such as liquidity constraints, life‐cycle structure, and idiosyncratic earnings risks, that are critical in delivering a positive capital income tax rate. We show that a sufficiently large measure of individuals having self‐control preferences, or alternatively, a sufficiently high cost of exercising self‐control, puts downward pressure on the optimal capital income tax rate. (JEL E21, E62, H55)
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