On the Optimal Timing of Taxes

John Hassler (), Per Krusell (), Kjetil Storesletten () and Fabrizio Zilibotti ()

No 4731, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the optimal timing of taxes on capital income. We show that the celebrated result that taxes should front-loaded with an initially high tax followed by a discrete jump to the steady state is knife-edge, hinging on capital having a constant depreciation rate. An empirically supported deviation from this case, involving depreciation rates that increase over the lifespan of the investment, implies that optimal taxes should oscillate. Furthermore, the optimality of fluctuating tax rates hinges on the government being able to commit to the path of future tax rates. Without commitment, optimal taxes may be smooth also under accelerating depreciation. In a calibrated example, we find that optimal taxes are oscillating under commitment and smooth without commitment.

Keywords: capital depreciation; optimal taxation; tax dynamics; time-consistency (search for similar items in EconPapers)
JEL-codes: D90 E61 H21 H30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
Date: 2004-11

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