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Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models

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  • Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte

    (Department of Economics, University of Iowa)

  • Pierre-Daniel Sarte

    () (Federal Reserve Bank of Richmond)

  • Jorge Soares

    () (Department of Economics,University of Delaware)

Abstract

In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.

Suggested Citation

  • 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.
  • Handle: RePEc:dlw:wpaper:06-08
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    File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-08.pdf
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    References listed on IDEAS

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    Cited by:

    1. Salvador Ortigueira & Joana Pereira, 2007. "Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets," Economics Working Papers ECO2007/41, European University Institute.
    2. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 565-588, March.

    More about this item

    Keywords

    Capital Taxation; Ramsey; Commitment; Markov-Perfect equilibrium; Time consistent policy; Overlapping Generations;

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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