The Effects of Financing Unfunded Social Security with Consumption Taxation when Consumers are Shortsighted
Date of Award
Master of Science (MS)
Economics and Finance
Using a representative-agent life-cycle model with consumer shortsightedness, I study an unfunded social security program financed via consumption taxation. Compared to financing an unfunded program with payroll taxation, I find that there is only a slight increase in well-being across planning horizons that is generated by a program with a consumption tax.
We suggest that both our data and the available time-series evidence are consistent with Milton Friedman's view that people save to smooth consumption over several years but, because of liquidity constraints, caution, or shortsighted-ness do not seek to smooth consumption over longer horizons. . . . Indeed, Milton Friedman explicitly rejected the idea that consumers had horizons as long as a lifetime in discussing the permanent income hypothesis (Carroll and Summers 1991 pp. 307, 355).
Clagg, Michael P., "The Effects of Financing Unfunded Social Security with Consumption Taxation when Consumers are Shortsighted" (2013). All Graduate Plan B and other Reports. 339.
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