Optimal Dynamic Nonlinear Income Taxes with No Commitment
We wish to study optimal dynamic nonlinear income taxes. Do real world taxes share some of their features? What policy prescriptions can be made? We study a two period model, where the consumers and government each have separate budget constraints in the two periods, so income cannot be transferred between periods. Labor supply in both periods is chosen by the consumers. The government has memory, so taxes in the first period are a function of first period labor income, whereas taxes in the second period are a function of both first and second period labor income. The government cannot commit to future taxes. Time consistency is thus imposed as a requirement. The main results of the paper show that time consistent incentive compatible two period taxes involve separation of types in the first period and a differentiated lump sum tax in the second period, provided that the discount rate is high or utility is separable between labor and consumption. In the natural extension of the Diamond (1998) model with quasi-linear utility functions to two periods, an equivalence of dynamic and static optimal taxes is demonstrated, and a necessary condition for the top marginal tax rate on first period income is found.
|Date of creation:||21 Jun 2011|
|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.:
- Roberts, Kevin, 1984. "The Theoretical Limits of Redistribution," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 177-95, April.
- Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski, 2007.
"Political Economy of Mechanisms,"
321307000000000886, UCLA Department of Economics.
- Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
- Adriano Rampini & Alberto Bisin, 2005.
"Markets as Beneficial Constraints on the Government,"
2005 Meeting Papers
325, Society for Economic Dynamics.
- Bisin, Alberto & Rampini, Adriano A., 2006. "Markets as beneficial constraints on the government," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 601-629, May.
- Stefania Albanesi & Christopher Sleet, 2006.
"Dynamic Optimal Taxation with Private Information,"
Review of Economic Studies,
Oxford University Press, vol. 73(1), pages 1-30.
- Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers 4006, C.E.P.R. Discussion Papers.
- Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
- Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
- Guesnerie, R., 1995.
"The genealogy of modern theoretical public economics: From first best to second best,"
European Economic Review,
Elsevier, vol. 39(3-4), pages 353-381, April.
- Guesnerie, R., 1994. "The Genealogy of Modern Theoretical Public Economics: From first best to second best," DELTA Working Papers 94-25, DELTA (Ecole normale supérieure).
- Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, June.
- Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
- Dillen, M. & Lundholm, M., 1992.
"Dynamic Income Taxation, Redistribution, and the Ratchet Effect,"
1992-3, Uppsala - Working Paper Series.
- Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, vol. 59(1), pages 69-93, January.
- Narayana R. Kocherlakota, 2005.
"Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation,"
Econometric Society, vol. 73(5), pages 1587-1621, 09.
- Narayana Kocherlakota, 2004. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 122247000000000729, UCLA Department of Economics.
- Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
- Marco Battaglini & Stephen Coate, 2003.
"Pareto Efficient Income Taxation with Stochastic Abilities,"
NBER Working Papers
10119, National Bureau of Economic Research, Inc.
- Battaglini, Marco & Coate, Stephen, 2008. "Pareto efficient income taxation with stochastic abilities," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 844-868, April.
- Stephen Coate & Marco Battaglini, 2004. "Pareto Efficient Income Taxation with Stochastic Abilities," 2004 Meeting Papers 140, Society for Economic Dynamics.
- Brito, D.L. & Hamilton, J.H. & Slutsky, S.H. & Stiglitz, J.E., 1989.
"Dynamic Optimal Income Taxation With Government Commitment,"
89-8, Florida - College of Business Administration.
- Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1991. "Dynamic optimal income taxation with government commitment," Journal of Public Economics, Elsevier, vol. 44(1), pages 15-35, February.
- Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1990. "Dynamic Optimal Income Taxation with Government Commitment," NBER Working Papers 3265, National Bureau of Economic Research, Inc.
- Doepke, Matthias & Townsend, Robert M., 2006.
"Dynamic mechanism design with hidden income and hidden actions,"
Journal of Economic Theory,
Elsevier, vol. 126(1), pages 235-285, January.
- Doepke, Matthias & Townsend, Robert M, 2004. "Dynamic Mechanism Design with Hidden Income and Hidden Auctions," CEPR Discussion Papers 4455, C.E.P.R. Discussion Papers.
- Matthias Doepke & Robert M. Townsend, 2002. "Dynamic Mechanism Design With Hidden Income and Hidden Actions," UCLA Economics Working Papers 818, UCLA Department of Economics.
- Battaglini, Marco, 2005.
"Optimality and Renegotiation in Dynamic Contracting,"
CEPR Discussion Papers
5014, C.E.P.R. Discussion Papers.
- Battaglini, Marco, 2007. "Optimality and renegotiation in dynamic contracting," Games and Economic Behavior, Elsevier, vol. 60(2), pages 213-246, August.
- Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
- Berliant, Marcus & Page, Frank H, Jr, 2001. "Income Taxes and the Provision of Public Goods: Existence of an Optimum," Econometrica, Econometric Society, vol. 69(3), pages 771-84, May.
- Diamond, Peter A, 1998.
"Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates,"
American Economic Review,
American Economic Association, vol. 88(1), pages 83-95, March.
- Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
- Benhabib, J. & Rustichini, A., 1996.
"Optimal Taxes Without Commitment,"
96-18, C.V. Starr Center for Applied Economics, New York University.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:31749. 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.