Risky taxation in life-cycle models

The tax policy in the U.S. has been uncertain even though the measurement of the efficiency cost of taxation has been conducted in perfect foresight models. This dissertation studies the effect of uncertainty of the tax policy in life-cycle models. Chapter 1 examines the causality between the intergenerational transfer of resources and the real interest rates which are closely related to the capital accumulation. The index for the intergenerational transfer of resources is the net social security wealth, constructed with the projections on the demographic characteristics of the U.S., the OASI benefit payment, and the OASI payroll tax revenue, by the U.S. Social Security Administration. It is found that the causality from the net social security wealth to the real interest rates is strong in the long run. This implies that the intergenerational linkage through altruism is not significant. Chapter 2 examines the effect of uncertainty of the tax policy in a stochastic overlapping generations model. The agents\u27 expectations on the tax rates are captured by a stochastic specification of tax rates. Numerical simulations demonstrate that the effects of the uncertain tax policy are quite different across various tax bases. In addition, due to the difference in the proportion of income which results in the difference in tax liabilities across generations, some different results from those in a representative agent model are found. Chapter 3 examines the redistributive effect of uncertainty of the tax policy. The heterogeneity of the agent in the model is based not only on the difference in ages but also on the difference in the bequest motive. The model includes two types of families, a high income family, whose members are altruistically linked, and a low income family, whose members are not altruistically linked. Numerical simulations demonstrate that the welfare cost of the risky taxation is larger for the low income family, because for the high income family, the exogenous shock such as variations of the tax rates can be well cushioned by adjusting the resource allocation across generations