Abstract
In the public finance literature the multiperiod consumption savings model has been used to study the efficiency aspects of income, consumption, and other taxes.1 The multiperiod model has also been used by Friedman, Ando and Modigliani, and others in theoretical and empirical consumption studies, but without any explicit allowance for the effect of taxes on consumption-saving decisions. As shown below, incorporation of income taxes leads to several changes in Friedman's (1957) analysis and in the interpretation of results from cross section studies. Perhaps our most important conclusion is that if cross section studies are to be used to buttress Friedman's contention that the consumption-permanent-income elasticity is one, then the interest elasticity of savings must be zero. A second important result is that cross section data can be used to estimate the interest elasticity of savings.
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