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Public spending and optimal taxes without commitment

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Author Info

  • Andrés Velasco
  • Jess Benhabib
  • Aldo Rustichini

Abstract

We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitly the constraint that at no point in time the revision of the original tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the difference in tax rate between the second and third best policy for a wide range of parameters. For some of these the difference between the second and third best tax rates is large, and so are the associated rates of economic growth.

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Bibliographic Info

Article provided by Springer in its journal Review of Economic Design.

Volume (Year): 6 (2001)
Issue (Month): 3 ()
Pages: 371-396

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Handle: RePEc:spr:reecde:v:6:y:2001:i:3:p:371-396

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Cited by:
  1. George-Marios Angeletos, 2000. "Fiscal Policy and the Maturity Structure with Non-Contingent Debt," Econometric Society World Congress 2000 Contributed Papers 0802, Econometric Society.
  2. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," CEP Discussion Papers dp1055, Centre for Economic Performance, LSE.
  3. Daron Acemoglu, 2005. "Politics and Economics in Weak and Strong States," NBER Working Papers 11275, National Bureau of Economic Research, Inc.
  4. George Economides & Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2003. "Electoral Uncertainty, Fiscal Policies and Growth: Theory and Evidence from Germany, the UK and the US," Working Papers 2003_16, Business School - Economics, University of Glasgow.

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