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On the Optimal Tax Schedule

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Author Info
Radim Bohacek
Michal Kejak

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Abstract

In this paper we develop a new general methodology for computing the optimal, welfare maximizing social planner's policies for economies with heterogeneous agents in which the stationary distribution of agents is a part of the optimization problem. Previous models analyzing the effects of government policies in this class of models were limited to sub-optimal policy reforms exogenously imposed on the model. Our approach does not use any additional restrictions or assumptions on the equilibrium allocations but is strictly derived from the first order and envelope conditions, and from the stationarity of the endogenous distribution of agents in the steady state. In other words, we solve simultaneously for the optimal individual allocations, for the optimal policy function, and for the distribution of agents. The methodology provides for a general solution method applicable to a wide range of optimal government policies in models with heterogeneous agents. We illustrate the methodology by solving for a Ramsey problem with distortionary taxation of total income from labor and capital incomes. The optimal tax schedule takes simultaneously into account its impact on the endogenous distribution of agents over assets in the steady state and the resulting welfare consequences.

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 714.

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Date of creation: 2004
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Handle: RePEc:red:sed004:714

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Related research
Keywords: Optimal taxation; dynamic macroeconomics;

Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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This page was last updated on 2009-11-5.


This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.