"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

104 The Life-Cycle Hypothesis
17. This conclusion has also been reached by W. Vickrey, op. cit.
18. See, e.g., the following two recent and as yet unpublished studies prepared for the Commission
on Money and Credit: D. B. Suits, “The Determinants of Consumer Expenditure: a Review of Present
Knowledge”; and E. C. Brown, R. M. Solow, A. K. Ando and J. Kareken, “Lags in Fiscal and Monetary
Policy,” Part II.
19. F. Modigliani and R. Brumberg, “Utility Analysis and the Consumption Function: An Interpretation
of Cross-section Data,” in Post-Keynesian Economics, K. Kurihara, ed. (Rutgers University
Press, 1954).
20. Cf. A. K. Ando and F. Modigliani, “Growth, Fluctuations and Stability,” American Economic
Review, May 1959, pp. 501–24.
21. Permanent in the sense that it persists as long as the debt remains outstanding.
22. Actually the fall in disposable income consequent upon the fall in K is likely to give rise to a
further fall in W and hence in K, but this indirect effect will tend to be of secondary magnitude. See
on this point note 33.
23. If the reduction in K results in a significant rise in r* and hence r, then, as pointed out by Vickrey
(op. cit., p. 135), there will tend to occur a shift in the distribution of pre-tax income. Labour income
will tend to shrink and property income to increase—and, incidentally, this increase will tend to more
than offset the fall in labour’s earnings. It does not follow, however, as Vickrey has concluded, that
the “primary burden of diminished future income will be felt by future wage earners.” For the burden
consists in the reduction of disposable income, and this reduction will depend on the distribution of
the taxes levied to pay the interest as between property and non-property income.
24. It may be noted that the cumulated reduction in consumption will tend to be somewhat larger
than s(dG) because the taxed generation will also lose some income as a result of the reduction in
their wealth, amounting initially to s(dG). However, the cumulated increase in saving over the interval
is still s(dG) because the additional loss in consumption just matches the reduction in income
from this source. Actually s(dG) measures essentially the present value as of t 1 of the required reduction
in consumption.
25. In a stimulating comment to a preliminary draft of this paper, Mr. Buchanan has provided an
explanation for his failure to analyse the temporal distribution of the burden of a tax-financed expenditure.
He points out that in line with the classic tradition, he defines the burden as the subjective loss
of utility suffered by the tax-payer because of the initial loss of resources. The burden in this sense
occurs entirely when the tax is levied and the later reduction of consumption cannot be separately
counted as burden, as it is merely the embodiment of the original burden. I have serious reservations
about the usefulness of this definition. It has, for instance, the peculiar implication that, when as a
result of tax financing an heir receives a smaller inheritance or as a result of debt financing he is
saddled with a larger tax bill, this cannot be counted as burden on him, as the entire burden is already
accounted for in the guise of his father’s grief that his heirs will enjoy a smaller net income. It is this
peculiar reasoning that underlies Ricardo’s famous conclusion that the cost of the government expenditure
is always fully borne by those present at the time.
26. It is conceivable that, e.g., the tax newly imposed to defray the interest cost might reduce the
bequests. To this extent an even greater burden is placed on later generations, which will inherit a
smaller K for two reasons: because of the smaller W and because of the wedge dG between W and
K. An even fancier possibility is that the new tax might spur the initial generation to increase its
bequests to help their heirs pay for the new tax. This would, of course, increase the burden on the
current generation and decrease that on posterity.
27. Note that, regardless of the value of omc, the current generation must always fare at least as well,
and generally better, under debt than under tax financing, even if it capitalised fully the new taxes
that must be raised to pay the interest bill on the new debt. For, even in the highly unlikely event that
the amount r(dD) per year necessary to pay the interest bill were levied entirely on the initial generations,
as long as they lived, this liability is limited by life, and hence represents a finite stream whose
present value must be less than the amount dD which would have been taken away in the case of tax
financing. See on this point also note 25.