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Optimal Taxes Without Commitment

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Author Info
Benhabib, J.
Rustichini, A.

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Abstract

In the problem of optimal taxation in an economy with two productive factors, labor and capital, the optimal solution when the government can commit to a sequence of tax rates, has the tax on capital tending to zero in the limit, with all the tax burden on labour. It is well known, however, that this solution is time inconsistent; so if the commitment power is not perfect, this second best tax plan will not be suitable. We model explicitly the tradeoff between the cost of revising the tax plan, and the benefit of the revision.

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Publisher Info
Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 96-18.

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Length: 29 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:cvs:starer:96-18

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Related research
Keywords: FISCAL POLICY; CAPITAL; TAXES; TAXATION;

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Find related papers by JEL classification:
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

References listed on IDEAS
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  1. Kemp, Murray C & Long, Ngo Van & Shimomura, Koji, 1993. "Cyclical and Noncyclical Redistributive Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 415-29, May. [Downloadable!] (restricted)
  2. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Filippo Occhino, 2005. "Optimal Fiscal Policy over the Business Cycle," Departmental Working Papers 200502, Rutgers University, Department of Economics. [Downloadable!]
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  2. Davide Debortoli & Ricardo Nunes, 2007. "Loose commitment," International Finance Discussion Papers 916, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Mino, Kazuo, 2000. "Optimal Taxation in Dynamic Economies with Increasing Returns," MPRA Paper 17324, University Library of Munich, Germany. [Downloadable!]
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  4. Mark Aguiar & Manuel Amador & Gita Gopinath, 2005. "Efficient Fiscal Policy and Amplification," NBER Working Papers 11490, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Jang-Ting Guo, 2004. "Tax Policy Under Keeping Up with the Joneses and Imperfectly Competitive Product Markets," Econometric Society 2004 North American Winter Meetings 17, Econometric Society. [Downloadable!]
  7. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, Taxes and the Median Voter," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 211-223, April. [Downloadable!] (restricted)
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  8. Reis, Catarina, 2006. "Taxation without Commitment," MPRA Paper 2071, University Library of Munich, Germany. [Downloadable!]
  9. Erkki Koskela & Leopold von Thadden, 2003. "Optimal Factor Taxation under Wage Bargaining -- A Dynamic Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  10. Conconi, Paola & Perroni, Carlo & Riezman, Raymond, 2007. "Is Partial Tax Harmonization Desirable?," The Warwick Economics Research Paper Series (TWERPS) 795, University of Warwick, Department of Economics. [Downloadable!]
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  11. Martin Barbie & Claudia Hermeling, 2009. "The geometry of optimal taxation: a primal approach," Economic Theory, Springer, vol. 39(1), pages 129-155, April. [Downloadable!] (restricted)
  12. Mark Aguiar & Manuel Amador & Gita Gopinath, 2007. "Investment Cycles and Sovereign Debt Overhang," NBER Working Papers 13353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Aidt, T. & Magris, F., 2003. "Capital Taxation and Electoral Accountability," Cambridge Working Papers in Economics 0318, Faculty of Economics, University of Cambridge. [Downloadable!]
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  14. Koskela, Erkki & von Thadden, Leopold, 2002. "Optimal factor taxation under wage bargaining: A dynamic perspective," Discussion Paper Series 1: Economic Studies 2002,31, Deutsche Bundesbank, Research Centre. [Downloadable!]
  15. Arefiev, Nikolay & Baron, Tatyana, 2006. "Capital Taxation and Rent Seeking," MPRA Paper 9988, University Library of Munich, Germany. [Downloadable!]
  16. Jang-Ting Guo & Juin-Jen Chang, 2008. "Social Status and Optimal Income Taxation," Working Papers 200814, University of California at Riverside, Department of Economics, revised Dec 2008. [Downloadable!]
  17. Mark Aguiar & Manuel Amador & Gita Gopinath, 2006. "Efficient expropriation: sustainable fiscal policy in a small open economy," Working Papers 06-9, Federal Reserve Bank of Boston. [Downloadable!]
  18. Danyang Xie, 2002. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Macroeconomics 0212004, EconWPA. [Downloadable!]
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  19. Baltasar Manzano & Jesús Ruiz, 2002. "Política Fiscal Óptima: el estado de la Cuestión," Documentos del Instituto Complutense de Análisis Económico 0212, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales. [Downloadable!]
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  20. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Ramsey Taxation," Levine's Bibliography 122247000000002192, UCLA Department of Economics. [Downloadable!]
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  21. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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