Public Capital and Optimal Taxes Without Commitment

Jess Benhabib, Aldo Rustichini and A. Velasco

Working Papers from C.V. Starr Center for Applied Economics, New York University

Abstract: We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitely the constraint that at no point in time the revision of the original tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the difference in tax rate between the second and third best policy for a wide range of parameters.

Keywords: CAPITAL; TAXES; TAXATION (search for similar items in EconPapers)
JEL-codes: D90 H20 H21 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1996
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:cvs:starer:96-19

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