On the Optimal Timing of Taxes

Fabrizio Zilibotti, John Hassler and Kjetil Storesletten
Authors registered in the RePEc Author Service: Per Krusell

No 4731, CEPR Discussion Papers from Centre for Economic Policy Research

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: Optimal taxation; Tax dynamics; Time-consistency; Capital depreciation (search for similar items in EconPapers)
JEL-codes: D90 E61 H21 H30 (search for similar items in EconPapers)
Date: 2004-11
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (3)

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