The Timing Effect of Taxation
The Overlapping-Generations Model
First, we explain the conflict among generations during the transition of a tax reform. An increase in consumption tax affects the tax burden among generations differently because of the timing effect of taxation. For simplicity, we consider the incidence of lump sum taxes using a simple two-period overlapping-generations model because the timing effect can be analyzed by investigating income effects. Each generation lives for two periods: the young and old periods. Let us call generation t the generation that is born at the beginning of t — 1 and dies at the end of t.
The government has to collect a given amount of tax, say 1о, in each period. The government can impose different taxes on the young generation and the old generation. The population of each generation is normalized as 1 and stationary. An increase in consumption tax effectively changes the timing of taxation and hence affects the different incidence on each generation. The timing effect of taxation concerns the income effect only; thus, it may be analyzed by changes in lump sum taxes.
Table 9.1 shows the situation whereby the government initially collects taxes from the young generation in the amount of 5 and from the old generation in the amount of 5. In Table 9.1a, in period 3 a tax reform is conducted so that after period 3 the young generation pays о and the old generation pays 1о. The timing of taxation is moved to the later period of life. However, in Table 9.1b, because of tax reform in period 3, the young generation pays 1о and the old generation pays
о. The timing of taxation is moved toward the earlier period. In either instance, the government still collects 10 in each period as before.
Table 9.1 Tax collection from young and old generations