SSE/EFI Working Paper Series in Economics and Finance
Risky Taxes, Budget Balance Preserving Spreads and Precautionary Savings
Abstract: The paper analyzes the effects on consumption from changes
in the riskiness of taxes. It starts by reinterpreting the Sandmo 
paper on general capital income risk to the case of risky capital taxation.
In his framework the concept of a mean preserving spread (MPS) is used for
the risk analysis. In connection with risky taxes it is however possible to
explicitly connect the tax risk with the government's budget constraint. In
this paper the concept of a budget balance preserving spread (BBPS) is
developed and used for the analysis of stochastic taxes. The paper is
concluded with a comparison of the effects that a MPS and a BBPS has on
consumption decisions. It is shown that the comparative statics results for
a BBPS could be different from the results obtained with a MPS.
Keywords: Tax risk; precautionary savings; (follow links to similar papers)
JEL-Codes: E21; H31; D81; E2; (follow links to similar papers)
32 pages, October 1995
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