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Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government

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  • Berliant, Marcus
  • Fujishima, Shota

Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We argue that the zero top marginal tax rate result in static models is of little practical importance because it actually holds only when the top earner in the initial period receives the highest shock in every period.

Suggested Citation

  • Berliant, Marcus & Fujishima, Shota, 2012. "Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government," MPRA Paper 41947, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:41947
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    References listed on IDEAS

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    1. 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.
    2. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-190, Fall.
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    6. Marcus Berliant & John O. Ledyard, 2014. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 196-221, April.
    7. Narayana R. Kocherlakota, 2004. "Wedges and Taxes," American Economic Review, American Economic Association, vol. 94(2), pages 109-113, May.
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    More about this item

    Keywords

    Optimal income taxation; New dynamic public finance;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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