Optimal vs. time-consistent tax cycles
Fabrizio Zilibotti (),
John Hassler () and
Per Krusell ()
No 47, 2004 Meeting Papers from Society for Economic Dynamics
How does the size of the transfer system evolve in the short and in the long run? We construct a model where taxation is distortionary because it discourages capital accumulation. We compare the Ramsey allocation with the time-consistent allocation. The latter can be interpreted as the outcome of a politico-economic mechanism. A general finding is that the lack of commitment induces too persistent redistribution relative to what would have been chosen by a utilitarian planner under commitment. Another finding is that the standard result that optimal taxes should be "smooth" (possibly, after a finite number of periods) is not robust, and that the commitment solution may exhibit cycles.
Keywords: tax cycles; time smoothing; probabilistic voting (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed004:47
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