Precautionary Saving and the Timing of Taxes
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NBER Working Paper No. 2680 (Also Reprint No. r1266)
Issued in September 1989
NBER Program(s): EFG PE
This paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely-lived households having uncertain and heterogeneous incomes. The special structure of the model allows exact aggregation across households despite incomplete markets. The effects of government debt are shown to be substantial, roughly comparable to those resulting from finite horizons, and crucially dependent on the length of time until the debt is repaid. Also, anticipated changes in taxes are shown to cause anticipated changes in consumption. Finally, an index of fiscal stance is derived.
Published: Journal of Political Economy, Vol. 97, No. 4, pp. 863-879, (August 1989).
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