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Optimal Nonlinear Taxation of Income and Savings without Commitment

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  • Craig Brett

    ()
    (Mount Allison University)

  • John Weymark

    ()
    (Department of Economics, Vanderbilt University)

Abstract

Optimal nonlinear taxation of income and savings is considered in a two-period model with two individuals who have additively separable preferences and who only differ in their skill levels. When the government can commit to its second period policy, taxes on savings do not form part of the optimal tax mix. When commitment is not possible, the optimal tax scheme distorts private savings behavior. If the types are separated in period one, it is optimal to tax the savings of the high-skilled individual and to tax the savings of the low-skilled individual at a lower, possibly negative, rate. If the types are pooled in period one, it is optimal for the low-skilled (high-skilled) individual to face a marginal savings tax (subsidy). In both cases, the savings of the high-skilled individual are distorted because this individual rationally expects that some of his savings will be redistributed to the low-skilled individual in the second period. The savings of the low-skilled individual in the separating case are taxed at a lower rate so as to relax an incentive compatibility constraint.

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File URL: http://www.accessecon.com/pubs/VUECON/vu08-w05.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0805.

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Date of creation: Jan 2008
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Handle: RePEc:van:wpaper:0805

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: Asymmetric information; commitment; dynamic optimal taxation; optimal income taxation; savings taxation; time consistency;

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References

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  1. Laurent Simula, 2007. "Optimality conditions and comparative static properties of non-linear income taxes revisited," PSE Working Papers halshs-00588074, HAL.
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  3. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
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  13. Berliant, Marcus & Ledyard, John, 2011. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," MPRA Paper 31749, University Library of Munich, Germany.
  14. Craig Brett & John A. Weymark, 2008. "Public Good Provision And The Comparative Statics Of Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 255-290, 02.
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Citations

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Cited by:
  1. Brett, Craig, 2008. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," MPRA Paper 8585, University Library of Munich, Germany.
  2. Krause, Alan, 2009. "Optimal nonlinear income taxation with learning-by-doing," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1098-1110, October.
  3. 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.
  4. Aronsson, Thomas & Johansson-Stenman, Olof, 2013. "Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences," Working Papers in Economics 558, University of Gothenburg, Department of Economics.
  5. 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.
  6. Aronsson, Thomas & Granlund, David, 2010. "Present-Biased Preferences and Publicly Provided Health Care," HUI Working Papers 41, HUI Research.
  7. Alan Krause, 2008. "Optimal Nonlinear Income Taxation with Learning-by-Doing," Discussion Papers 08/08, Department of Economics, University of York.
  8. Jenny Simon, 2014. "The Role of Imperfect Financial Markets for Social Redistribution," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 32-37, 01.
  9. Aronsson, Thomas & Johansson-Stenman, Olof, 2011. "State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach," UmeÃ¥ Economic Studies 828, Umeå University, Department of Economics.
  10. Aronsson, Thomas & Johansson-Stenman, olof, 2013. "State-Variable Public Goods and Social Comparisons over Time," Working Papers in Economics 555, University of Gothenburg, Department of Economics.

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