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Dynamic Optimal Income Taxation with Government Commitment

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

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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3265.

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Date of creation: Feb 1990
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Publication status: published as Journal of Public Economics, Vol. 44, pp. 15-35, (1991).
Handle: RePEc:nbr:nberwo:3265

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  1. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Richard J. Arnott & Joseph E. Stiglitz, 1988. "Randomization with Asymmetric Information," NBER Working Papers 2507, National Bureau of Economic Research, Inc.
  3. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
  4. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  5. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  6. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  7. Brito, D.L. & Hamilton, J.H. & Slutsky, S.M. & Stiglitz, J.E., 1989. "Randomization In Optimal Income Tax Schedules," Papers 89-6, Florida - College of Business Administration.
  8. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 261-67, June.
  9. 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.
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