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On the Optimal Timing of Taxes

Author

Listed:
  • Zilibotti, Fabrizio
  • Hassler, John
  • Storesletten, Kjetil

Abstract

This Paper analyses the optimal timing of taxes on capital income. We show that the celebrated result that taxes should front-loaded with an initially high tax followed by a discrete jump to the steady state is knife-edge, hinging on capital having a constant depreciation rate. An empirically supported deviation from this case, involving depreciation rates that increase over the lifespan of the investment, implies that optimal taxes should oscillate. Furthermore, the optimality of fluctuating tax rates hinges on the government being able to commit to the path of future tax rates. Without commitment, optimal taxes may be smooth also under accelerating depreciation. In a calibrated example, we find that optimal taxes are oscillating under commitment and smooth without commitment.

Suggested Citation

  • Zilibotti, Fabrizio & Hassler, John & Storesletten, Kjetil, 2004. "On the Optimal Timing of Taxes," CEPR Discussion Papers 4731, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4731
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    Citations

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    Cited by:

    1. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004. "Time-Consistent Public Expenditures," Levine's Bibliography 122247000000000652, UCLA Department of Economics.
    2. Mathias Trabandt, 2006. "Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending," 2006 Meeting Papers 668, Society for Economic Dynamics.
    3. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.

    More about this item

    Keywords

    Optimal taxation; Tax dynamics; Time-consistency; Capital depreciation;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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