The credibility of commitment and optimal nonlinear savings taxation

Yunmin Chen, Jang-Ting Guo and Alan Krause

Journal of Macroeconomics, 2020, vol. 65, issue C

Abstract: Previous studies that examine optimal nonlinear taxation of savings/capital have assumed either full-commitment or no-commitment by the government. This raises the question as to whether the results under full-commitment and no-commitment provide upper and lower bounds on the optimal marginal savings tax rates. This paper shows that they do not. Specifically, we consider an infinite-horizon overlapping generations model in which agents attach some probability to whether or not the government can commit. When these probabilistic beliefs differ among high-skill individuals, the optimal steady-state marginal savings tax rates may fall outside those under the polar cases of full-commitment and no-commitment. Our numerical analysis finds that this theoretical possibility can occur under a baseline calibration with empirically plausible values of model parameters, and that it remains qualitatively robust with respect to various parametric changes.

Keywords: Savings taxation; Commitment; Multi-Dimensional screening (search for similar items in EconPapers)
JEL-codes: E60 H21 H24 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:65:y:2020:i:c:s0164070420301579

DOI: 10.1016/j.jmacro.2020.103231

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