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Social discounting and incentive compatible fiscal policy

  • Reis, Catarina

This paper considers a representative agent 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 the households, the capital income tax will be positive in steady state. Thus, impatience and lack of commitment are able to generate positive capital taxes in the long run, although each of these characteristics individually was not. Furthermore, the steady state to which the economy converges is independent of initial conditions.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 6 ()
Pages: 2469-2482

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:6:p:2469-2482
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  1. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  2. Sleet, Christopher & Yeltekin, Sevin, 2008. "Politically credible social insurance," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 129-151, January.
  3. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 467-475, August.
  4. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  5. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
  6. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Dominguez, Begona, 2007. "Public debt and optimal taxes without commitment," Journal of Economic Theory, Elsevier, vol. 135(1), pages 159-170, July.
  8. Christopher Sleet & Sevin Yeltekin, 2006. "Credibility and endogenous societal discounting," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 410-437, July.
  9. 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.
  10. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  11. Emmanuel Farhi & Iván Werning, 2007. "Inequality and Social Discounting," Journal of Political Economy, University of Chicago Press, vol. 115, pages 365-402.
  12. V. V. Chari & Patrick E. Kehoe, 1990. "Sustainable Plans and Mutual Default," IMF Working Papers 90/22, International Monetary Fund.
  13. Benhabib, J. & Rustichini, A., 1996. "Optimal Taxes Without Commitment," Working Papers 96-18, C.V. Starr Center for Applied Economics, New York University.
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