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Time-consistent optimal fiscal policy

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  • Paul Klein
  • JosÈ-VÌctor RÌos-Rull

Abstract

This article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period's capital income tax rate. We find that the results contrast markedly with those under full commitment. First, capital income tax rates are very high (65% on average versus close to zero on average under full commitment). Second, labor income taxes are rather low on average (about 12% versus a value of around 31% under full commitment). Finally, labor income taxes are quite volatile, whereas under full commitment their standard deviation is essentially zero. Copyright 2003 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Paul Klein & JosÈ-VÌctor RÌos-Rull, 2003. "Time-consistent optimal fiscal policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1217-1245, November.
  • Handle: RePEc:ier:iecrev:v:44:y:2003:i:4:p:1217-1245
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
    3. Dobson, Paul W., 1994. "Multifirm unions and the incentive to adopt pattern bargaining in oligopoly," European Economic Review, Elsevier, vol. 38(1), pages 87-100, January.
    4. Kathryn J. Ready, 1990. "Is Pattern Bargaining Dead?," ILR Review, Cornell University, ILR School, vol. 43(2), pages 272-279, January.
    5. Daniel Diermeier & Roger B. Myerson, 1994. "Bargaining," Discussion Papers 1089, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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