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Optimal vs. time-consistent tax cycles

Author

Listed:
  • Fabrizio Zilibotti
  • John Hassler
  • Per Krusell

Abstract

How does the size of the transfer system evolve in the short and in the long run? We construct a model where taxation is distortionary because it discourages capital accumulation. We compare the Ramsey allocation with the time-consistent allocation. The latter can be interpreted as the outcome of a politico-economic mechanism. A general finding is that the lack of commitment induces too persistent redistribution relative to what would have been chosen by a utilitarian planner under commitment. Another finding is that the standard result that optimal taxes should be "smooth" (possibly, after a finite number of periods) is not robust, and that the commitment solution may exhibit cycles.

Suggested Citation

  • Fabrizio Zilibotti & John Hassler & Per Krusell, 2004. "Optimal vs. time-consistent tax cycles," 2004 Meeting Papers 47, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:47
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    More about this item

    Keywords

    tax cycles; time smoothing; probabilistic voting;

    JEL classification:

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

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