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Time-consistent taxation in a dynastic family model with human and physical capital and a balanced government budget

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Author Info

  • James B. Davies
  • Jinli Zeng
  • Jie Zhang

Abstract

This paper analyzes optimal, time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget. When tax revenue is used for publicly provided consumption or lump-sum transfers, leisure would be higher than its social optimum. Pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax. Also, it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax, and hence it is not a practical guide to policy. Further, a consumption tax, or equivalently a uniform income tax with investment subsidies at the same rate, can be improved on by taxing capital income more heavily than labour income.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 42 (2009)
Issue (Month): 3 (August)
Pages: 1023-1049

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Handle: RePEc:cje:issued:v:42:y:2009:i:3:p:1023-1049

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Cited by:
  1. Igor Kotlán & Zuzana Machová & Lenka Janíčková, 2011. "Taxation Influence On The Economic Growth," Politická ekonomie, University of Economics, Prague, vol. 2011(5), pages 638-658.

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