Public Finance in an Overlapping Generations Economy

312 Pages·1996·10.347 MB·English

by  Toshihiro Ihori

Public Finance in an
Overlapping
Generations Economy
Toshihiro Ihori
PUBLIC FINANCE IN AN OVERLAPPING
GENERATIONS ECONOMY
This page intentionally left blank
Public Finance in an
Overlapping
Generations Economy
Toshihiro Ihori
Professor, Department of Economics
University of Tokyo
Japan
AS First published in Great Britain 1996 by
MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG2I 6XS
and London
Companies and representatives
throughout the world
A catalogue record for this book is available
from the British Library.
ISBN 0-333-66192-3
First published in the United States of America 1996 by
AS
ST. MARTIN'S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue,
New York, N.Y. 10010
ISBN 0-312-16166-2
Library of Congress Cataloging-in-Publication Data
Ihori, Toshihiro, 1952-
Public finance in an overlapping generations economy / Toshihiro
Ihori.
p. cm.
Includes bibliographical references and index.
ISBN 0-312-16166-2 (cloth)
1. Finance, Public—Econometric models. I. Title.
HJ141.135 1996
336—dc20 96-2800
CIP
© Toshihiro Ihori 1996
All rights reserved. No reproduction, copy or transmission of
this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied or
transmitted save with written permission or in accordance with
the provisions of the Copyright, Designs and Patents Act 1988,
or under the terms of any licence permitting limited copying
issued by the Copyright Licensing Agency, 90 Tottenham Court
Road, London WIP9HE.
Any person who docs any unauthorised act in relation to this
publication may be liable to criminal prosecution and civil
claims for damages.
10 9 8 7 6 54 3 21
05 04 03 02 01 00 99 98 97 96
Printed and bound in Great Britain by
Antony Rowe Ltd, Chippcnham, Wiltshire
Contents
List of Figures viii
List of Tables ix
Preface and Acknowledgements xi
1 Introduction 1
1 Overview 1
2 Review of basic concepts 8
2 The Model 19
1 Introduction 19
2 The basic model 19
3 Capital accumulation and efficiency 26
4 Endogenous labor supply 35
5 Bequests 37
6 The multi-period framework 39
7 Conclusion 41
3 Tax Policy 42
1 Introduction 42
2 The optimal tax rule 43
3 Tax reform and the timing of tax payments 57
4 Capital income taxation 65
5 Further topics 71
4 Simulation Studies 73
1 Introduction 73
2 The basic model and tax reform 73
3 The dynamic simulation model with endogenous labor
supply 83
4 The separation of efficiency and redistribution 88
5 Human capital investment 91
6 Concluding remarks 98
v
VI Contents
5 Public Spending 99
1 Introduction 99
2 Fiscal spending financed by lump-sum taxation 100
3 Fiscal spending financed by non-lump-sum taxation 102
4 Optimal spending of public goods 105
5 Public investment 112
6 The Open Economy 116
1 Introduction 116
2 The two-country model 117
3 Negative international spillover effects of consumption
taxation 123
4 Capital income taxation 130
5 Optimal tax and spending policy 137
7 Money 144
1 Introduction 144
2 Overlapping generations models with money 145
3 Money and inflationary taxes 153
4 Welfare implications of indexing capital income
taxation 165
8 Land 176
1 Introduction 176
2 Land and lump-sum taxes 177
3 Money, land, and taxes 185
9 Government Debt 198
1 Introduction 198
2 Government debt and intergenerational transfer 199
3 Debt neutrality with altruistic bequests 206
4 The chain-letter problem 210
5 Future tax reforms in a debt-financed economy 220
10 Social Security 225
1 Introduction 225
2 Overlapping generations model when fertility changes 226
3 Multi-period overlapping generations model 233
Contents vn
4 Welfare effects of an unfunded system when labor
supply is endogenous 235
5 Further study 241
11 Intergenerational Transfers 242
1 Introduction 242
2 Intergenerational transfers with bequests 244
3 Public capital and economic growth 253
4 Human capital and endogenous growth 259
5 Further study on human capital formation 270
Notes 272
References 281
Author Index 292
Subject Index 295
List of Figures
1.1 The phase diagram 16
2.1 Consumer's optimizing behavior 22
2.2 The factor price frontier 23
2.3 Uniqueness and stability 26
2.4 Phase diagram of the basic model 29
2.5 The golden rule 31
2.6 The Cobb-Douglas case 33
2.7 Long-run equilibrium 34
3.1 Tax reform and capital accumulation 61
4.1 Equilibrium in the bench mark model 77
4.2 Welfare effects of tax reform 86
4.3 Human capital accumulation and tax reform 95
7.1 Samuelson's (1958) overlapping generations model 146
7.2 Money in an economy with durable goods 149
7.3 The dynamics of Diamond's (1965) model 151
7.4 Seigniorage 155
8.1 Dynamics of the model with land 182
8.2 The transitionary effect: an increase in government
spending 194
9.1 The burden of debt 204
9.2 Dynamics of the chain-letter problem model 213
9.3 Changes in the marginal cost of public goods 216
9.4 Changes in the level of public goods 218
10.1 The baby boom generation 227
11.1 The steady state physical capital-human capital ratio 265
11.2 Taxes and economic growth 268
viii
List of Tables
2.1 Two-period overlapping generations model 21
3.1 Tax reform and intergenerational incidence 64
3.2 Piecemeal change in capital income taxation
(<*23 ~ CT ^0) 69
33
3.3 Piecemeal change in capital income taxation
(G - a > 0) 69
23 33
4.1 Interest elasticities of saving 78
4.2 Steady state welfare cost of capital income taxation 81
4.3 Inclusion of bequests 83
4.4 Effects of changing to a wage or consumption tax,
fixed labor-supply model 90
4.5 Effects of changing to a wage or consumption tax,
endogenous labor supply 92
4.6 Steady state baselines 97
6.1 Taxation of consumption, 1995 124
6.2 Comparative static results 137
8.1 Dynamic incidence results 196
10.1 Pay-as-you-go system: benefits received, contributions,
and net benefits 230
10.2 Switch to the fully funded 233
11.1 Estimates of the share of transfer wealth 243
11.2 Intergenerational transfer: the effect on growth rate 259
IX