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On the Difference between Income and Consumption Taxes when the Return to Savings is Uncertain

Published online by Cambridge University Press:  17 August 2016

Wolfram F. Richter
Affiliation:
University of Dortmund
Wolfgang Wiegard
Affiliation:
University of Regensburg
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Summary

The taxation of income is usually criticized for the efficiency loss that results from distorting the intertemporal consumption decision. This argument is rejected in a world where the return to savings is random. It is shown that a distorting marginal tax on uncertain interest income serves as partial insurance and that this effect outweighs the efficiency loss, if only the first marginal dollar in tax revenue is valued less elastically than the last dollar spent on private consumption. A consumption tax — even one with intertemporally differentiated rates — would not provide insurance under these circumstances. The explicit consideration of uncertainty thus gives support to taxes that allow differentiation between the safe withdrawal of savings and the random return thereon.

Résumé

Résumé

La critique habituelle de la taxation des revenus est que la distorsion qui en résulte dans les décisions intertemporelles de consommation entraine une perte d'efficience. Nous réfutons cet argument dans un univers où le rendement de l'épargne est aléatoire. Nous montrons que si l'intérêt est incertain, sa taxation, tout en étant source de distorsion, joue un rôle d'assurance. La condition pour que cet effet compense la perte d'efficience est que le premier dollar perçu à la marge sous forme de taxe soit valorisé moins élastiquement que le dernier dollar de consommation privée. Cette fonction d'assurance, par contre, ne serait pas remplie si l'impôt portait sur la consommation, même avec une différenciation intertemporelle des taux. La prise en compte explicite de l'incertitude plaide donc en faveur d'un système fiscal qui tient compte de la différence entre une capacité certaine de retirer son épargne et le caractère aléatoire du rendement de celle-ci.

Keywords

Type
Research Article
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1991 

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Footnotes

*

We thank Wolfgang Buchholz and two anonymous referees for many helpful comments. The usual disclaimer applies.

References

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