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Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems

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  • Jang-Ting Guo

    ()
    (Department of Economics, University of California Riverside)

  • Alan Krause

    ()
    (Department of Economics, University of York)

Abstract

This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation, or to use linear income taxation, when the government cannot commit to its future tax policy. We consider both two- period and inÖnite-horizon settings. Under empirically plausible parameter values, separating income taxation is optimal in the two-period model, whereas linear income taxation is optimal when the time horizon is inÖnite. The welfare e§ects of varying the discount rate, the degree of wage inequality, and the population of high-skill workers are also explored. For realistic changes in these parameters, separating income taxation remains optimal in the two-period formulation, and linear income taxation remains optimal in the inÖnite-horizon model.

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File URL: http://economics.ucr.edu/repec/ucr/wpaper/10-05.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201005.

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Length: 28 pages
Date of creation: Jun 2010
Date of revision: Jun 2010
Handle: RePEc:ucr:wpaper:201005

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Keywords: Dynamic Income Taxation; Commitment;

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  1. Jang-Ting Guo & Alan Krause, 2008. "Optimal Nonlinear Income Taxation with Habit Formation," Working Papers 200810, University of California at Riverside, Department of Economics, revised Aug 2008.
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Cited by:
  1. Jang-Ting Guo & Alan Krause, 2010. "Optimal Dynamic Nonlinear Income Taxation under Loose Commitment," Discussion Papers 10/23, Department of Economics, University of York.
  2. Jang-Ting Guo & Alan Krause, . "Dynamic Nonlinear Income Taxation with Quasi-Hyperbolic Discounting and No Commitment," Discussion Papers 11/16, Department of Economics, University of York.

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