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Optimal vs. time-consistent tax cycles

Fabrizio Zilibotti (), John Hassler () and Per Krusell ()

No 47, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: 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)
Date: 2004
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