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Abstract

Orthodox consumption (saving) functions typically regard income (or wealth) as exogenously determined. Yet the "representative agent" may be regarded as a labor supplier, an asset portfolio manager, and a consumer. In this interpretation, "income" is a discretionary variable whose optimal values emerge as a result of a constrained optimization procedure, a process that, inter alia, takes account of the prevailing income-tax structure. Given the optimal income flow, the agent qua consumer then determines his (her) optimal consumption-saving pattern. This stage-two optimization process is also influenced by the prevailing tax structure. This article develops the logic of the two-stage optimization model and provides some time series evidence relating to both stages.

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Two-Stage Optimization,Tax Rates,and Saving: Some Time Series Evidence

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