Taxation without commitment
This paper considers a Ramsey model of linear capital and labor income taxation in which a benevolent government cannot commit ex-ante to a sequence of policies for the future. In this setup, if the government is forced to keep budget balance in every period, then it may not be able to sustain zero capital taxes in the long run, as shown in Benhabib and Rustichini (J Econ Theory 77:231–259, 1997 ) and Phelan and Stachetti (Econometrica 69:1491–1518, 2001 ). However, (Dominguez in J Econ Theory 135:159–170, 2007 ) shows that if the government is allowed to borrow and lend to households, the optimal capital income tax still converges to zero in the long run, as long as the value of defaulting is independent of the level of government debt. This paper provides a game theoretic setup with government debt where the value of the worst equilibrium only depends on the initial level of capital and can be determined in advance. This implies that under our assumptions the best sustainable equilibrium has zero capital taxes in the long run, even in the absence of government commitment. Copyright Springer-Verlag 2013
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 52 (2013)
Issue (Month): 2 (March)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/199/PS2|
References listed on IDEAS
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.:
- Marcet, Albert & Marimon, Ramon, 1992.
"Communication, commitment, and growth,"
Journal of Economic Theory,
Elsevier, vol. 58(2), pages 219-249, December.
- Albert Marcet & Ramon Marimon, 1991. "Communication, commitment and growth," Economics Working Papers 1, Department of Economics and Business, Universitat Pompeu Fabra.
- Albert Marcet & Ramon Marimon, 1992. "Communication, commitment, and growth," Discussion Paper / Institute for Empirical Macroeconomics 74, Federal Reserve Bank of Minneapolis.
- Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
- Benhabib, J. & Rustichini, A., 1996.
"Optimal Taxes Without Commitment,"
96-18, C.V. Starr Center for Applied Economics, New York University.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Klein Paul & Quadrini Vincenzo & Rios-Rull Jose-Victor, 2005. "Optimal Time-Consistent Taxation with International Mobility Of Capital," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-36, June.
- S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002.
"Optimal Taxation without State-Contingent Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 110(6), pages 1220-1254, December.
- Klein, Paul & Krusell, Per & Ríos-Rull, José-Víctor, 2004.
"Time Consistent Public Expenditures,"
CEPR Discussion Papers
4582, C.E.P.R. Discussion Papers.
- Judd, Kenneth L., 1985.
"Redistributive taxation in a simple perfect foresight model,"
Journal of Public Economics,
Elsevier, vol. 28(1), pages 59-83, October.
- Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Jorge Soares & Marina Azzimonti & Pierre-Daniel Sarte, 2005. "Optimal Fiscal Policy and the (Lack of) Time Inconsistency Problem," 2005 Meeting Papers 481, Society for Economic Dynamics.
- Dominguez, Begona, 2007. "Public debt and optimal taxes without commitment," Journal of Economic Theory, Elsevier, vol. 135(1), pages 159-170, July.
- Narayana Kocherlakota, 2010.
"Implications of Efficient Risk Sharing Without Commitment,"
Levine's Working Paper Archive
2053, David K. Levine.
- Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 595-609.
- Karine Gobert & Michel Poitevin, 2006.
"Non-commitment and savings in dynamic risk-sharing contracts,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(2), pages 357-372, 06.
- GOBERT, Karine & POITEVIN, Michel, 1998. "Non-Commitment and Savings in Dynamic Risk-Sharing Contracts," Cahiers de recherche 9806, Universite de Montreal, Departement de sciences economiques.
- Chari V. V. & Kehoe Patrick J., 1993.
"Sustainable Plans and Debt,"
Journal of Economic Theory,
Elsevier, vol. 61(2), pages 230-261, December.
- Christopher Phelan & Ennio Stacchetti, 2001.
"Sequential Equilibria in a Ramsey Tax Model,"
Econometric Society, vol. 69(6), pages 1491-1518, November.
- Debraj Ray, 2002. "The Time Structure of Self-Enforcing Agreements," Econometrica, Econometric Society, vol. 70(2), pages 547-582, March.
- Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
- Mark Aguiar & Manuel Amador & Gita Gopinath, 2006. "Efficient expropriation: sustainable fiscal policy in a small open economy," Working Papers 06-9, Federal Reserve Bank of Boston.
- V. V. Chari & Patrick J. Kehoe, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 175-195.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-32, May.
- Chari, V V & Kehoe, Patrick J, 1990.
Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 783-802, August.
- Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006.
"Markets Versus Governments: Political Economy of Mechanisms,"
NBER Working Papers
12224, National Bureau of Economic Research, Inc.
- Daron Acemoglu & Michael Golosov & Oleg Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," 2006 Meeting Papers 348, Society for Economic Dynamics.
- Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," Levine's Bibliography 321307000000000032, UCLA Department of Economics.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982.
"Optimal Fiscal and Monetary Policy in an Economy Without Capital,"
532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
- Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte & Pierre-Daniel Sarte & Jorge Soares, 2006. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models," Working Papers 06-08, University of Delaware, Department of Economics.
- 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.
- V. V. Chari & Patrick E. Kehoe, 1990.
"Sustainable Plans and Mutual Default,"
IMF Working Papers
90/22, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:52:y:2013:i:2:p:565-588. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.