Tax Policy with Quasi-Geometric Discounting

Per Krusell, Burhanettin Kuruscu and Anthony Smith

International Economic Journal, 2000, vol. 14, issue 3, 1-40

Abstract: We study the effects of tazation in a model with a representative agent with time Inconsistent preferences: discounting is quasi-geometric. Utility is derived from Consumption and leisure, and tazation can be based on consumption and investmentc Spending as well as on capital and labor income. The model allows for closed form Solutions, and welfare comparisons can be made across taxation systems. Optimal taxation analysis in this model leads to time inconsistency issues for the government, assuming that the government shares the consumer's preferences and Cannot commit to future taxes. We study time-consistent policy equilibria for Different tax constitutions. A tax constitution specifies what tax instruments are Available, and we assume that the government can commit to a tax constitution. The Results show that a constitution leaving the government with no ability to tax results in Strictly higher welfare than one where the government has full freedom to tax. Indeed, for some parameter values, the best tax constitution of all is laissez faire (even though the government is benevolent and fully rational). For other parameter values, it may be optimal to allow the government to use a less than fully restricted set of tax bases. [D6,E6,H2]

Date: 2000
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DOI: 10.1080/10168730000000025

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