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Markovian Optimal Taxation

Author

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  • Salvador Ortigueira

Abstract

In this paper we study optimal taxation in a dynamic game played by a sequence of governments, one for each time period, and a private sector composed of a continuum of households. We focus on the Markov-perfect equilibrium of this game under two assumptions on the extent of government's intra-period commitment, which in turn define two notions of time consistency of the Markov policy. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment.

Suggested Citation

  • Salvador Ortigueira, 2004. "Markovian Optimal Taxation," 2004 Meeting Papers 315, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:315
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    Cited by:

    1. Zheng Song, 2011. "The Dynamics of Inequality and Social Security in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 613-635, October.

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    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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