Optimal tax policy under habit formation and capital utilization

Monteiro, Gonçalo; Cook, Adam; Dey, Sanjoy

doi:10.1016/j.jmacro.2013.03.001

Cited by 7 publications

(8 citation statements)

References 24 publications

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“…First, it reconciles two distinct approaches in the literature on habit formation; the aggregate habit approach (e.g. Abel, 1990;Monteiro et al, 2013) which considers only a single aggregate consumption good and the corresponding habit; and the 'deep' habits approach by Ravn et al (2006;, which allows for habit formation at the level of many specific goods. Second, existing specifications of good-specific habit formation (e.g.…”

Section: Introductionmentioning

confidence: 94%

“…Aronsson and JohanssonStenman (2014) find that non-internalized habits tend to increase optimal marginal labor taxes, and have ambiguous effects on optimal capital taxes. In the context of growth, Alonso-Carrera et al (2005), Turnovsky and Monteiro (2007) and Monteiro et al (2013) characterize the income and consumption tax rates that implement the optimal path of consumption as the economy transitions to a balanced growth path. In Cremer et al's (2010) two-period model with retirement, habit formation and myopia cause overconsumption and undersaving in the first period of life.…”

Section: Introductionmentioning

confidence: 99%

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Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Bijgaart

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Habits are an important cause of sluggish consumption adjustment in response to price shocks. This paper studies shifts within the consumption bundle under endogenous habit formation. I put forward a model with good-specific, or 'deep', habits that cause persistence in good-specific consumption. In addition, at the aggregate level, habits act as a benchmark against which consumption is evaluated. I evaluate dynamic consumption choices under the realistic assumption that the consumer imperfectly internalizes the habit formation process. I compare consumption choices to the welfare-maximizing choices, and determine the path of taxes or subsidies that implements first-best consumption, both when goods are produced competitively and when they are produced by monopolists. I establish that a transition to a new consumption bundle is more likely inefficiently sluggish if the persistence effect is relatively strong. Strategic pricing behavior by monopolists leads to inefficiently rapid transitions. To explore the quantitative implications of the model I consider the introduction of a 10 percent charge on a subset of goods. I find that consumption adjusts inefficiently fast; implementing first-best adjustment requires a transitory discount of up to 60 percent of the cost increase. JEL-Codes: D110, D620, H210, H230. Terms of use: Documents in

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Section: Introductionmentioning

confidence: 94%

Section: Introductionmentioning

confidence: 99%

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Bijgaart

2017

SSRN Journal

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show abstract

Section: Introductionmentioning

confidence: 97%

“…Aronsson and Johansson-Stenman (2014) find that non-internalized habits tend to increase optimal marginal labor taxes, and have ambiguous effects on optimal capital taxes. In the context of growth, Alonso-Carrera et al ( 2005), Turnovsky and Monteiro (2007) and Monteiro et al (2013) characterize the income and consumption tax rates that implement the optimal path of consumption as the economy transitions to a balanced growth path. In Cremer et al's (2010) two-period model with retirement, habit formation and myopia cause overconsumption and undersaving in the first period of life.…”

Section: Introductionmentioning

confidence: 99%

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Bijgaart

2018

SSRN Journal

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“…These two versions are referred to as the inward-and outward-looking versions, respectively, by Carroll et al (1997). The inward version is adopted by Carroll et al (2000), Monteiro et al (2013) following Ryder and Heal (1973), etc., while the outward version is considered by Liu and Turnovsky (2005), Turnovsky and Monteiro (2007), Wendner (2011), among others. Finally, both types of consumption reference levels are 2 Different terms for positional preferences have been used in the literature, with slightly differing meanings.…”

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confidence: 99%

Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation

Ghosh

Wendner

2014

SSRN Journal

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Abstract. This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption-and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth.Consequently, optimal consumption-and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics. Keywords and Phrases:Conspicuous consumption, conspicuous wealth, endogenous growth, public capital, optimal consumption tax JEL Classification Numbers: D62, D91, E21, H21, O41 * Corresponding author. Email address: ronald.wendner@uni-graz.at 1 We are indebted to Stella Zilian for valuable research assistance. We also thank Evangelos Dioikitopoulos for insightful debates on a previous version of this paper. We retain sole responsibility for any remaining errors.2

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Optimal tax policy under habit formation and capital utilization

Cited by 7 publications

References 24 publications

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Too Slow a Change? Deep Habits, Consumption Shifts and Transitory Tax Policy

Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation

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