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Public investment criteria under optimal nonlinear income taxation without commitment

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  • Shigeo Morita
  • Takuya Obara

Abstract

In this study, we highlight that the incredibility of the government's commitment to a certain tax policy is a determinant of production inefficiency. We show that if the government cannot commit to a certain tax policy and if the types of taxpayers are completely separated, then the production efficiency theorem could be violated in an optimal solution. In this case, an incremental unit of public or private capital affects taxpayers' labor supply through wage rates. In a situation where public capital is more (less) complementary to labor than private capital, public investment tightens (relaxes) the incentive compatibility constraint more than private investment.

Suggested Citation

  • Shigeo Morita & Takuya Obara, 2021. "Public investment criteria under optimal nonlinear income taxation without commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 732-745, August.
    • Handle: RePEc:bla:jpbect:v:23:y:2021:i:4:p:732-745
    DOI: 10.1111/jpet.12513
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    References listed on IDEAS

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    Cited by:

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