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

  • 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)

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.

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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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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-08.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-08
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  17. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
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