CONVERSION TO A CONSUMPTION TAX IN A GROWTH-MODEL WITH HETEROGENEITY

Conversion of an income tar to an equally progressive consumption tar can increase aggregate saving because of ''heterogeneity,'' even if ea ch household maintains a constant propensity to save. Heterogeneity th e variation in the propensity to save among households, implies that c onversion shifts disposable income within each income class from low s avers to high savers, thereby raising aggregate saving. Using a growth model and U.S, data, we estimate an upper bound of the short-run and long-run increase in the saving rate due to heterogeneity.