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TEMPTATION‐DRIVEN BEHAVIOR AND TAXATION: A QUANTITATIVE ANALYSIS IN A LIFE‐CYCLE MODEL
Author(s) -
Kumru Cagri S.,
Thanopoulos Athanasios C.
Publication year - 2015
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12170
Subject(s) - temptation , economics , overlapping generations model , earnings , capital (architecture) , microeconomics , market liquidity , capital income , monetary economics , tax reform , public economics , international taxation , finance , archaeology , history , psychology , social psychology
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)