Optimal fiscal policy under finite planning horizons

Euiyoung Jung () and Chul-In Lee
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Euiyoung Jung: Universidad de Alicante

International Tax and Public Finance, 2024, vol. 31, issue 6, No 5, 1550-1583

Abstract: Abstract We propose a novel framework that revisits the seminal Chamley-Judd zero capital taxation result in light of bounded rationality stemming from a finite policy planning horizon and structural frictions in fiscal institutions. We show a mechanism that generates positive optimal capital taxation in the long run. Our numerical results indicate that the current tax system in the United States could be near-optimal in a constrained environment where policymakers exhibit limited policy planning horizons and imperfect altruism toward household welfare under subsequent governments.

Keywords: Fiscal policy; Optimal taxation; Institution; Bounded rationality (search for similar items in EconPapers)
JEL-codes: E02 E62 E71 H21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10797-024-09845-w

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