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| Author: | Smith, W. T. |
| Title: | Taxes, uncertainty, and long-term growth |
| Journal: | European Economic Review
1996 : NOV, VOL. 40:8, p. 1647-1664 |
| Index terms: | TAXATION UNCERTAINTY GROWTH INCOMES SAVINGS |
| Language: | eng |
| Abstract: | The way in which taxes affect growth is fundamentally altered by uncertainty. That is because tax policies can change the riskiness of disposable income. An increase in the income tax rate, for example, reduces both the mean and variance of after-tax income. The reduction in the mean reduces savings, as predicted by models without uncertainty. However, the reduction in the risk may decrease or increase savings depending upon whether consumers are averse to intertemporal substitution. In case the elasticity of intertemporal substitution is small, then the fall in the variance reinforces the effects of the fall in the mean. That is, an increase in the tax rate reduces growth by much more than predicted by non-stochastic models. In the case of large intertemporal substitution, the fall in the variance causes growth to decrease by less than predicted. |
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