Optimal Dynamic Income Taxation under Quasi-Hyperbolic Discounting and Idiosyncratic Productivity Shocks

Yunmin Chen () and Jang-Ting Guo
Additional contact information
Yunmin Chen: National Central University, Taiwan

No 202403, Working Papers from University of California at Riverside, Department of Economics

Abstract: In the context of a dynamic (three-period) general equilibrium model, this paper examines the optimal tax rates on capital savings and labor income under quasi-hyperbolic discounting and idiosyncratic productivity shocks. In the absence of skill-type uncertainty, we analytically show that the marginal capital tax wedges on agents' first-period savings are negative for correcting inherent preference internalities, and that these tax rates will be higher when productivity disturbances are incorporated. In the stochastic two-type setting with exogenously-given factor input prices, our calibrated numerical experiments find that the marginal capital wedges for both types on their period-1 savings are positive, indicating the government's motive to relax individuals' incentive-compatibility constraints. We also quantitatively find that the optimal tax rates for both types on their first- and second-period capital savings, as well as the economy's social welfare, are ceteris paribus decreasing in the degree of quasi-hyperbolic discounting because of a stronger need to rectify negative utility internalities.

Keywords: Optimal Dynamic Income Taxation; Quasi-Hyperbolic Discounting; Idiosyncratic Productivity Shocks. (search for similar items in EconPapers)
JEL-codes: D91 H21 H24 (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-dge, nep-inv, nep-pbe, nep-pub and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://economics.ucr.edu/repec/ucr/wpaper/202403.pdf First version, 2024 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:202403

Access Statistics for this paper

More papers in Working Papers from University of California at Riverside, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Kelvin Mac ().