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Optimal Nonlinear Taxation of Income and Savings Without Commitment

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Listed:
  • Craig Brett

    (Mount Allison University)

  • John A Weymark

    (Vanderbilt University)

Abstract

When a government is unable to commit to its future tax policies, information about taxpayers' characteristics revealed by their behavior may be used to extract more taxes from them in the future. We examine the implications of this ratchet effect for the design of redistributive income and savings tax policies in a two-period model with two types of individuals who only differ in their skill levels. When commitment is not possible, it may be optimal to separate, pool, or partially pool different types in period one. The nature of the distortions to labor supplies and savings are investigated for each of these three regimes. Novel rationales for savings distortions are identified.

Suggested Citation

  • Craig Brett & John A Weymark, 2016. "Optimal Nonlinear Taxation of Income and Savings Without Commitment," Vanderbilt University Department of Economics Working Papers 16-00010, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-sub-16-00007
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; commitment; optimal income taxation; ratchet effect; savings taxation;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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