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Social Discounting and Incentive Compatible Fiscal Policy

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  • Catarina Reis

    (Universidade Catolica Portuguesa)

Abstract

This paper considers a Ramsey model of linear capital and labor income taxation in which the government cannot commit ex-ante to a sequence of policies for the future. In this setup, if the government is more impatient than households, the capital income tax will always be positive in steady state. Furthermore, the steady state to which the economy converges is independent of initial conditions. Numerical simulations suggest that as the difference between private and public discounting increases, the level of the steady state capital tax and public debt also become higher.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 413.

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Date of creation: 2009
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Handle: RePEc:red:sed009:413

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  1. De Bonis, Valeria & Spataro, Luca, 2005. "Taxing Capital Income As Pigouvian Correction: The Role Of Discounting The Future," Macroeconomic Dynamics, Cambridge University Press, vol. 9(04), pages 469-477, September.
  2. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, vol. 69(6), pages 1491-1518, November.
  3. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer, vol. 52(2), pages 565-588, March.
  4. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  5. Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.
  6. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  7. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and mutual default," Staff Report 124, Federal Reserve Bank of Minneapolis.
  8. Benhabib, Jess & Rustichini, Aldo, 1997. "Optimal Taxes without Commitment," Journal of Economic Theory, Elsevier, vol. 77(2), pages 231-259, December.
  9. Dominguez, Begona, 2007. "Public debt and optimal taxes without commitment," Journal of Economic Theory, Elsevier, vol. 135(1), pages 159-170, July.
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