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 taxes for the future. In this setup, if the government is allowed to borrow and lend to the consumers, the optimal capital income tax is zero in the long run. This result stands in marked contrast with the recent literature on optimal taxation without commitment, which imposes budget balance and typically finds that the optimal capital income tax does not converge to zero. Since it is efficient to backload incentives, breaking budget balance allows the government to generate surplus that reduces its debt or increases its assets over time until the lack of commitment is no longer binding and the economy is back in the full commitment solution. Therefore, while the lack of commitment does not change the optimal capital tax in the long run, it may impose an upper bound on the level of long run debt.
|Date of creation:||Dec 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- 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.
- Christopher Phelan & Ennio Stacchetti, 1999.
"Sequential equilibria in a Ramsey tax model,"
258, Federal Reserve Bank of Minneapolis.
- Chari V. V. & Kehoe Patrick J., 1993.
"Sustainable Plans and Debt,"
Journal of Economic Theory,
Elsevier, vol. 61(2), pages 230-261, December.
- 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.
- Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004.
"Time-Consistent Public Expenditures,"
122247000000000652, UCLA Department of Economics.
- 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.
- Narayana Kocherlakota, 2010.
"Implications of Efficient Risk Sharing Without Commitment,"
Levine's Working Paper Archive
2053, David K. Levine.
- Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
- V. V. Chari & Patrick E. Kehoe, 1990.
"Sustainable Plans and Mutual Default,"
IMF Working Papers
90/22, International Monetary Fund.
- Albert Marcet & Ramon Marimon, 1992.
"Communication, commitment, and growth,"
Discussion Paper / Institute for Empirical Macroeconomics
74, Federal Reserve Bank of Minneapolis.
- 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.
- 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.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Karine Gobert & Michel Poitevin, 2006.
"Non-commitment and savings in dynamic risk-sharing contracts,"
Springer, 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.
- 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.
- 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.
- Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
- Debraj Ray, 2002. "The Time Structure of Self-Enforcing Agreements," Econometrica, Econometric Society, vol. 70(2), pages 547-582, March.
- 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.
- Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
- 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 & 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.
- Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," NBER Working Papers 12224, National Bureau of Economic Research, Inc.
- 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.
- Benhabib, Jess & Rustichini, Aldo, 1997.
"Optimal Taxes without Commitment,"
Journal of Economic Theory,
Elsevier, vol. 77(2), pages 231-259, December.
- Dominguez, Begona, 2007. "Public debt and optimal taxes without commitment," Journal of Economic Theory, Elsevier, vol. 135(1), pages 159-170, July.
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:2071. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.