Optimal Dynamic Nonlinear Income Taxation under Loose Commitment
AbstractThis paper examines an infinite-horizon model of dynamic nonlinear income taxation in which there exists a small probability that the government cannot commit to its future tax policy. In this "loose commitment" environment, we find that even a little uncertainty over whether the government can commit yields substantial effects on the optimal dynamic nonlinear income tax system. Under an empirically plausible parameterization, numerical simulations show that high-skill individuals must be subsidized in the short run, despite the government's redistributive objective, unless the probability of commitment is higher than 98%. Loose commitment also reverses the short-run welfare effects of changes in most model parameters. In particular, all individuals are worse-off, rather than better-off, in the short run when the proportion of high-skill individuals in the economy increases. Finally, our main findings remain qualitatively robust to a setting in which loose commitment is modelled as a Markov switching process.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 10/23.
Date of creation: Oct 2010
Date of revision:
Contact details of provider:
Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
Dynamic Income Taxation; Loose Commitment;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-10-23 (Accounting & Auditing)
- NEP-ALL-2010-10-23 (All new papers)
- NEP-CMP-2010-10-23 (Computational Economics)
- NEP-PBE-2010-10-23 (Public Economics)
- NEP-PUB-2010-10-23 (Public Finance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jang-Ting Guo & Alan Krause, 2010.
"Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems,"
201005, University of California at Riverside, Department of Economics, revised Jun 2010.
- J-T Guo & A Krause, 2010. "Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems," Discussion Papers 10/15, Department of Economics, University of York.
- Jang-Ting Guo & Alan Krause, 2008.
"Optimal Nonlinear Income Taxation with Habit Formation,"
200810, University of California at Riverside, Department of Economics, revised Aug 2008.
- Jangâ€Ting Guo & Alan Krause, 2011. "Optimal Nonlinear Income Taxation with Habit Formation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(3), pages 463-480, 06.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson).
If references are entirely missing, you can add them using this form.