TEMPTATION‐DRIVEN BEHAVIOR AND TAXATION: A QUANTITATIVE ANALYSIS IN A LIFE‐CYCLE MODEL2. (4th November 2014)

• Record Type: Journal Article
• Authors: Kumru, Cagri S.; Thanopoulos, Athanasios C.
• Is Part Of: Economic inquiry. Volume 53:Number 3(2015:Jul.)
• Page Start: 1470
• Page End: 1490
• Publication Date: 2014-11-04
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1111/ecin.12170
• Languages: English
• ISSNs: 0095-2583

Abstract

<abstract abstract-type="main" id="ecin12170-abs-0001"> <title> <x xml:space="preserve">Abstract</x> </title> <p id="ecin12170-para-0001"> <italic>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</italic>. (<italic>JEL</italic> E21, E62, H55)</p> </abstract>