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The credibility of commitment and optimal nonlinear savings taxation

Author

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  • Chen, Yunmin
  • Guo, Jang-Ting
  • Krause, Alan

Abstract

Previous studies that examine optimal nonlinear taxation of savings/capital have assumed either full-commitment or no-commitment by the government. This raises the question as to whether the results under full-commitment and no-commitment provide upper and lower bounds on the optimal marginal savings tax rates. This paper shows that they do not. Specifically, we consider an infinite-horizon overlapping generations model in which agents attach some probability to whether or not the government can commit. When these probabilistic beliefs differ among high-skill individuals, the optimal steady-state marginal savings tax rates may fall outside those under the polar cases of full-commitment and no-commitment. Our numerical analysis finds that this theoretical possibility can occur under a baseline calibration with empirically plausible values of model parameters, and that it remains qualitatively robust with respect to various parametric changes.

Suggested Citation

  • Chen, Yunmin & Guo, Jang-Ting & Krause, Alan, 2020. "The credibility of commitment and optimal nonlinear savings taxation," Journal of Macroeconomics, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301579
    DOI: 10.1016/j.jmacro.2020.103231
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    More about this item

    Keywords

    Savings taxation; Commitment; Multi-Dimensional screening;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • 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

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