The Consumption Tax and the Saving Elasticity

It is often assumed that if an income tax is converted to a consumption tax, the resulting change in the capital/labor ratio of the economy depends on the saving elasticity (the response of individual saving to the interest rate). In one standard life-cycle growth model, we show that, though this is correct in the short run, it is incorrect in the long run: conversion to a consumption tax always raises the steady-state capital/labor ratio, and the increase is the same regardless of the saving elasticity (positive, zero, or negative). In this model, a particular steady state is compatible with very different saving elasticities.