Dynamic Nonlinear Income Taxation with Quasi-Hyperbolic Discounting and No Commitment

Jang-Ting Guo and Alan Krause

Discussion Papers from Department of Economics, University of York

Abstract: This paper examines a dynamic model of nonlinear income taxation in which the government cannot commit to its future tax policy, and individuals are quasi-hyperbolic discounters who cannot commit to future consumption plans. The government uses its taxation powers to maximise a utilitarian social welfare function which reflects individuals' true (long-run) preferences. Under first-best taxation, quasi-hyperbolic discounting has no effect on the level of social welfare attainable. Under second-best taxation, quasi-hyperbolic discounting increases (resp. decreases) the level of social welfare attainable when separating (resp. pooling) taxation is optimal. The effects of quasi-hyperbolic discounting on the optimal marginal tax rates applicable to labour and savings income are also explored.

Keywords: dynamic taxation; quasi-hyperbolic discounting; commitment. (search for similar items in EconPapers)
JEL-codes: D91 H21 H24 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment (2015)
Working Paper: Dynamic Nonlinear Income Taxation with Quasi-Hyperbolic Discounting and No Commitment (2014)
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