Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems

Jang-Ting Guo () and Alan Krause ()
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Jang-Ting Guo: Department of Economics, University of California Riverside

No 201005, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation, or to use linear income taxation, when the government cannot commit to its future tax policy. We consider both two- period and inÖnite-horizon settings. Under empirically plausible parameter values, separating income taxation is optimal in the two-period model, whereas linear income taxation is optimal when the time horizon is inÖnite. The welfare e§ects of varying the discount rate, the degree of wage inequality, and the population of high-skill workers are also explored. For realistic changes in these parameters, separating income taxation remains optimal in the two-period formulation, and linear income taxation remains optimal in the inÖnite-horizon model.

Keywords: Dynamic Income Taxation; Commitment (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2010-06, Revised 2010-06
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