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Dynamic optimal income taxation with government commitment

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  • Brito, Dagobert L.
  • Hamilton, Jonathan H.
  • Slutsky, Steven M.
  • Stiglitz, Joseph E.

Abstract

The optimal income taxation problem has been extensively studied in one-period models. This paper analyzes optimal income taxation when consumers work for many periods. We also analyze what information, if any, that the government learns about abilities in one period can be used in later periods to attain more redistribution than in a one-period world. When the government must commit itself to future tax schedules, intertemporal nonstationarity of tax schedules could relax the self-selection constraints and lead to Pareto improvements. The effect of nonstationarity is analogous to that of randomization in one-period models. The use of information is limited since only a single lifetime self-selection constraint for each type of consumer exists. These results hold when individuals and the government have the same discount rates. The planner can make additional use of the information when individual and social rates of time discounting differ. In this case, the limiting tax schedule is a nondistorting one if the government has a lower discount rate than individuals.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 44 (1991)
Issue (Month): 1 (February)
Pages: 15-35

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Handle: RePEc:eee:pubeco:v:44:y:1991:i:1:p:15-35

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1995. "Randomization in optimal income tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 56(2), pages 189-223, February.
  2. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  3. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. John C. Fellingham & Young K. Kwon & D. Paul Newman, 1984. "Ex ante Randomization in Agency Models," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 290-301, Summer.
  5. Richard Arnott & Joseph E Stiglitz, 2010. "Randomization with Asymmetric Information," Levine's Working Paper Archive 2054, David K. Levine.
  6. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  7. Guesnerie Roger & Seade Jesus, 1981. "Nonlinear pricing in a finite economy," CEPREMAP Working Papers (Couverture Orange) 8118, CEPREMAP.
  8. J. Riley & E. Maskin, 1981. "Optimal Auctions with Risk Averse Buyers," Working papers 311, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(2), pages 261-67, June.
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