The Effect of a Consumption Tax on the Rate of Interest / Martin Feldstein.

By:

Feldstein, Martin

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5397.Publication details: Cambridge, Mass. National Bureau of Economic Research 1995.Description: 1 online resource: illustrations (black and white)Subject(s):

Online resources:

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Abstract: This paper analyzes the ways in which substituting a consumption tax for the existing personal and corporate income taxes would affect equilibrium pretax interest rates. The analysis indicates that whether the pretax rate of interest rises or falls depends on the strength of the personal saving response, the nature of the capital market equilibrium between debt and equity yields, and the response of the owner-occupied housing sector. A formal two-sector model with endogenous saving, housing and corporate capital is presented. With plausible parameter values, the analysis suggests that the shift from an income tax to a consumption tax is more likely to raise rates than to lower them.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5397 (Browse shelf(Opens below))	Not For Loan

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December 1995.

This paper analyzes the ways in which substituting a consumption tax for the existing personal and corporate income taxes would affect equilibrium pretax interest rates. The analysis indicates that whether the pretax rate of interest rises or falls depends on the strength of the personal saving response, the nature of the capital market equilibrium between debt and equity yields, and the response of the owner-occupied housing sector. A formal two-sector model with endogenous saving, housing and corporate capital is presented. With plausible parameter values, the analysis suggests that the shift from an income tax to a consumption tax is more likely to raise rates than to lower them.