Government Reputation in Ramsey Taxation

Emin Ablyatifov and Georgy Lukyanov

Papers from arXiv.org

Abstract: We study optimal taxation when citizens hold beliefs about an honest versus opportunistic government and update those beliefs from observed taxes and delivery. In a Ramsey economy with competitive firms, the government privately knows its type: the honest type implements announced taxes and converts revenue into public goods, while the opportunistic type can strategically mimic or divert. Bayesian learning from policy choices and a noisy delivery signal disciplines taxation. We establish a trust cutoff: below it, optimal revenue is zero; above it, the revenue scale is increasing in reputation, with the dynamic cutoff lower than the static one. With broad instruments and symmetric monitoring, dynamic forces act through total revenue while the tax mix is indeterminate along a static equivalence frontier. More informative monitoring (in the Blackwell sense) expands fiscal scale and shrinks the no-tax region.

Date: 2025-09, Revised 2025-11
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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