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Abstract

This paper shows how to derive a complete set of optimality conditions characterising the solution to a dynamic optimal income tax problem in the spirit of Mirrlees (1971), under the assumption that a 'first-order' approach to incentive compatibility is valid.� The method relies on constructing perturbations to the consumption-output allocations of agents in a manner that preserves incentive compatibility for movements in both directions along the specified dimension.� We are able to use it to generalise the 'inverse Euler condition' to cases in which preferences are non-separable between consumption and labour supply, and to prove a number of novel results about optimal income and savings tax wedges.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 581.

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Date of creation: 01 Nov 2011
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Handle: RePEc:oxf:wpaper:581

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Related research

Keywords: New Dynamic Public Finance; First-order approach; Non-separable preferences; Inverse Euler condition;

Find related papers by JEL classification:

• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• 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
• H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-11-28 (All new papers)
• NEP-DGE-2011-11-28 (Dynamic General Equilibrium)
• NEP-PUB-2011-11-28 (Public Finance)

References

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1. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-74, Fall.
   
   • N. Gregory Mankiw & Matthew C. Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Harvard Business School Working Papers 09-140, Harvard Business School.
   • Mankiw, N. Gregory & Weinzierl, Matthew Charles & Yagan, Danny Ferris, 2009. "Optimal Taxation in Theory and Practice," Scholarly Articles 4263739, Harvard University Department of Economics.
   • N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
2. Matthias Messner & Nicola Pavoni & Christopher Sleet, 2011. "Recursive methods for incentive problems," Working Papers 381, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
   
   • Matthias Messner & Nicola Pavoni & Christopher Sleet, 2012. "Recursive Methods for Incentive Problems," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 501-525, October.
3. Werning, Ivan & Farhi, Emmanuel, 2007. "Inequality and Social Discounting," Scholarly Articles 3451391, Harvard University Department of Economics.
   
   • Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.

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