Optimal Nonlinear Taxation of Income and Savings without Commitment

Craig Brett and John Weymark

No 805, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

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.

Keywords: Asymmetric information; commitment; dynamic optimal taxation; optimal income taxation; savings taxation; time consistency (search for similar items in EconPapers)
JEL-codes: D82 H21 (search for similar items in EconPapers)
Date: 2008-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://www.accessecon.com/pubs/VUECON/vu08-w05.pdf First version, 2008 (application/pdf)

Related works:
Journal Article: Optimal nonlinear taxation of income and savings without commitment (2019)
Working Paper: Optimal Nonlinear Taxation of Income and Savings Without Commitment (2016)
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:van:wpaper:0805

Access Statistics for this paper

More papers in Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by John P. Conley ().