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Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government

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  • Berliant, Marcus
  • Fujishima, Shota

Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We show that the sluggish government cannot allow saving or borrowing regardless of the utility function. Moreover, we argue that the zero top marginal tax rate result in static models is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every period.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55088.

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Date of creation: 04 Apr 2014
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Handle: RePEc:pra:mprapa:55088

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Keywords: Optimal income taxation; New dynamic public finance;

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  1. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 140, Federal Reserve Bank of Minneapolis.
  2. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 46(2), pages 263-82, April.
  3. Emmanuel Farhi & Iván Werning, 2011. "Insurance and Taxation over the Life Cycle," NBER Working Papers 16749, National Bureau of Economic Research, Inc.
  4. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  5. Sun, Yeneng, 2006. "The exact law of large numbers via Fubini extension and characterization of insurable risks," Journal of Economic Theory, Elsevier, Elsevier, vol. 126(1), pages 31-69, January.
  6. Narayana R. Kocherlakota, 2004. "Wedges and Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 109-113, May.
  7. Martin Hellwig, 2005. "A Contribution to the Theory of Optimal Utilitarian Income Taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2005_23, Max Planck Institute for Research on Collective Goods.
  8. Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, Elsevier, vol. 92(3-4), pages 844-868, April.
  9. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1991. "Dynamic optimal income taxation with government commitment," Journal of Public Economics, Elsevier, Elsevier, vol. 44(1), pages 15-35, February.
  10. Marcus Berliant & John O. Ledyard, 2014. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 196-221, 04.
  11. Berliant, Marcus & Page, Frank H, Jr, 2001. "Income Taxes and the Provision of Public Goods: Existence of an Optimum," Econometrica, Econometric Society, Econometric Society, vol. 69(3), pages 771-84, May.
  12. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(4), pages 165-90, Fall.
  13. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, Elsevier, vol. 35(1), pages 19-25, February.
  14. Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
  15. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1165-85, September.
  16. Seade, Jesus, 1982. "On the Sign of the Optimum Marginal Income Tax," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 637-43, October.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Uncertainty, slow government and optimal taxes
    by Economic Logician in Economic Logic on 2013-06-20 14:00:00

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