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Time-consistent linear taxation and redistribution in an overlapping-generations framework

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  • Philippe Michel

Abstract

We study time-consistent labour and capital income linear taxation using an infinite-horizon overlapping-generations model of a small open economy. Individuals have different productivities and the government intervenes for purely redistributive purposes. The study of time-consistent taxation requires the introduction of borrowing restrictions in the economy. We characterize the time-consistent solution and consider alternative solutions based on a simple tax rule. We demonstrate the existence and the uniqueness of the time-consistent solution using a log-linear utility function. We provide numerical comparisons between time-consistent and time-inconsistent linear taxation: the importance of being able to make commitment decreases when the differences between individuals increase. Copyright 2002, Oxford University Press.

Suggested Citation

  • Philippe Michel, 2002. "Time-consistent linear taxation and redistribution in an overlapping-generations framework," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 247-269, April.
  • Handle: RePEc:oup:oxecpp:v:54:y:2002:i:2:p:247-269
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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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