Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models
AbstractIn the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.
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Bibliographic InfoPaper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-08.
Length: 39 pages
Date of creation: 2006
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Capital Taxation; Ramsey; Commitment; Markov-Perfect equilibrium; Time consistent policy; Overlapping Generations;
Find related papers by JEL classification:
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- H6 - Public Economics - - National Budget, Deficit, and Debt
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-CBA-2007-04-21 (Central Banking)
- NEP-DGE-2007-04-21 (Dynamic General Equilibrium)
- NEP-MAC-2007-04-21 (Macroeconomics)
- NEP-PBE-2007-04-21 (Public Economics)
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