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Optimal Nonlinear Taxation of Income and Savings without Commitment

Author

Listed:
  • Craig Brett

    () (Mount Allison University)

  • John Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

Optimal nonlinear taxation of income and savings is considered in a two-period model with two individuals who have additively separable preferences and who only differ in their skill levels. When the government can commit to its second period policy, taxes on savings do not form part of the optimal tax mix. When commitment is not possible, the optimal tax scheme distorts private savings behavior. If the types are separated in period one, it is optimal to tax the savings of the high-skilled individual and to tax the savings of the low-skilled individual at a lower, possibly negative, rate. If the types are pooled in period one, it is optimal for the low-skilled (high-skilled) individual to face a marginal savings tax (subsidy). In both cases, the savings of the high-skilled individual are distorted because this individual rationally expects that some of his savings will be redistributed to the low-skilled individual in the second period. The savings of the low-skilled individual in the separating case are taxed at a lower rate so as to relax an incentive compatibility constraint.

Suggested Citation

  • Craig Brett & John Weymark, 2008. "Optimal Nonlinear Taxation of Income and Savings without Commitment," Vanderbilt University Department of Economics Working Papers 0805, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0805
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    References listed on IDEAS

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    Cited by:

    1. Aronsson, Thomas & Johansson-Stenman, Olof, 2013. "Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences," Working Papers in Economics 558, University of Gothenburg, Department of Economics.
    2. Jang-Ting Guo & Alan Krause, 2018. "Changing social preferences and optimal redistributive taxation," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 73-92.
    3. Guo, Jang-Ting & Krause, Alan, 2015. "Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 101-119.
    4. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Genuine Saving and Conspicuous Consumption," Umeå Economic Studies 900, Umeå University, Department of Economics.
    5. 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.
    6. Jang‐Ting Guo & Alan Krause, 2011. "Optimal Nonlinear Income Taxation with Habit Formation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(3), pages 463-480, June.
    7. Aronsson, Thomas & Sjögren, Tomas, 2016. "Quasi-hyperbolic discounting, paternalism and optimal mixed taxation," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 24-36.
    8. Alan Krause, 2015. "On Redistributive Taxation under the Threat of High-Skill Emigration," Discussion Papers 15/21, Department of Economics, University of York.
    9. Craig Brett, 2012. "The effects of population aging on optimal redistributive taxes in an overlapping generations model," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 777-799, December.
    10. repec:ebl:ecbull:eb-17-00175 is not listed on IDEAS
    11. Aronsson, Thomas & Granlund, David, 2010. "Present-Biased Preferences and Publicly Provided Health Care," HUI Working Papers 41, HUI Research.
    12. Shigeo Morita, 2014. "Optimal income taxation without commitment: policy implications of durable goods," Discussion Papers in Economics and Business 14-32, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    13. repec:spr:sochwe:v:48:y:2017:i:4:d:10.1007_s00355-017-1038-8 is not listed on IDEAS
    14. Thomas Aronsson & David Granlund, 2014. "Present-Biased Preferences and Publicly Provided Private Goods," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(2), pages 169-199, June.
    15. Jenny Simon, 2014. "Imperfect Financial Markets as a Commitment Device for the Government," CESifo Working Paper Series 4902, CESifo Group Munich.
    16. Shigeo Morita, 2014. "The time consistent public goods provision," Discussion Papers in Economics and Business 14-31, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    17. repec:men:journl:v:3:y:2017:i:2:p:132-147 is not listed on IDEAS
    18. Garon, Jean-Denis, 2016. "The commitment value of funding pensions," Economics Letters, Elsevier, vol. 145(C), pages 11-14.
    19. Aronsson, Thomas & Sjögren, Tomas, 2017. "Optimal Taxation, Redistribution, and Environmental Externalities," Umeå Economic Studies 950, Umeå University, Department of Economics.
    20. repec:ces:ifodic:v:11:y:2014:i:4:p:19105974 is not listed on IDEAS
    21. Jenny Simon, 2014. "The Role of Imperfect Financial Markets for Social Redistribution," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(4), pages 32-37, 01.
    22. Aronsson, Thomas & Johansson-Stenman, Olof, 2011. "State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach," Umeå Economic Studies 828, Umeå University, Department of Economics.
    23. Aronsson, Thomas & Johansson-Stenman, olof, 2013. "State-Variable Public Goods and Social Comparisons over Time," Working Papers in Economics 555, University of Gothenburg, Department of Economics.

    More about this item

    Keywords

    Asymmetric information; commitment; dynamic optimal taxation; optimal income taxation; savings taxation; time consistency;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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