Hostname: page-component-7bb8b95d7b-wpx69 Total loading time: 0 Render date: 2024-09-20T19:13:32.222Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL DYNAMIC NONLINEAR INCOME TAXATION UNDER LOOSE COMMITMENT

Published online by Cambridge University Press:  21 May 2013

Jang-Ting Guo  and
Alan Krause
Jang-Ting Guo*
Affiliation:
University of California, Riverside
Alan Krause
Affiliation:
University of York
*
Address correspondence to: Jang-Ting Guo, Department of Economics, University of California, Riverside, Riverside, CA 92521-0427, USA; e-mail: guojt@ucr.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines an infinite-horizon model of nonlinear income taxation in which the probability that the government can commit is high, but not certain. In this “loose commitment” environment, we find that even a little uncertainty over whether the government can commit yields substantial effects on the optimal dynamic nonlinear income tax system. This result holds even though separating taxation remains optimal, as in the case of full commitment. Under an empirically plausible parameterization, our numerical simulations show that high-skilled individuals must be subsidized in the short run, despite the government's redistributive objective, unless the probability of commitment is higher than 98%. Loose commitment also reverses the short-run welfare effects of changes in most of the model's parameters, and yields some counterintuitive outcomes. For example, all individuals are worse off, rather than better off, in the short run when the proportion of high-skilled individuals in the economy increases.

Keywords

Dynamic Nonlinear Income TaxationLoose Commitment
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 6 , September 2014 , pp. 1403 - 1427
Copyright
Copyright © Cambridge University Press 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Apps, Patricia and Ray Rees (2006) Repeated Optimal Nonlinear Income Taxation. Mimeo, University of Munich.Google Scholar
Battaglini, Marco and Coate, Stephen (2008) Pareto efficient income taxation with stochastic abilities. Journal of Public Economics 92, 844–868.Google Scholar
Berliant, Marcus and Ledyard, John (2011) Optimal Dynamic Nonlinear Income Taxes with No Commitment. Mimeo, University of Washington, St. Louis.Google Scholar
Bester, Helmut and Strausz, Roland (2001) Contracting with imperfect commitment and the revelation principle: The single agent case. Econometrica 69, 1077–1098.Google Scholar
Brett, Craig and Weymark, John (2008a) Optimal Nonlinear Taxation of Income and Savings without Commitment. Working paper 08-W05, Vanderbilt University.Google Scholar
Brett, Craig and Weymark, John (2008b) The impact of changing skill levels on optimal nonlinear income taxes. Journal of Public Economics 92, 1765–1771.Google Scholar
Brett, Craig and Weymark, John (2011) How optimal nonlinear income taxes change when the distribution of the population changes. Journal of Public Economics 95, 1239–1247.Google Scholar
Chetty, Raj, Guren, Adam, Manoli, Day, and Weber, Andrea (2011) Are micro and macro labor supply elasticities consistent? A review of evidence on the intensive and extensive margins. American Economic Review 101, 471–475.Google Scholar
Debortoli, Davide and Nunes, Ricardo (2010) Fiscal policy under loose commitment. Journal of Economic Theory 145, 1005–1032.Google Scholar
Fang, Hanming (2006) Disentangling the college wage premium: Estimating a model with endogenous education choices. International Economic Review 47, 1151–1185.Google Scholar
Farhi, Emmanuel, Sleet, Christopher, Werning, Ivan, and Yeltekin, Sevin (2012) Nonlinear capital taxation without commitment. Review of Economic Studies 79, 1469–1493.Google Scholar
Gaube, Thomas (2007) Optimum taxation of each year's income. Journal of Public Economic Theory 9, 127–150.Google Scholar
Goldin, Claudia and Katz, Lawrence (2007) The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials 1890–2005. NBER working paper 12984.Google Scholar
Golosov, Mikhail, Troshkin, Maxim, and Tsyvinski, Aleh (2011) Optimal taxation: Merging micro and macro approaches. Journal of Money, Credit and Banking 43, 147–174.Google Scholar
Golosov, Mikhail, Tsyvinski, Aleh, and Werning, Ivan (2006) New dynamic public finance: A user's guide. NBER Macroeconomics Annual 2006, 317–387.Google Scholar
Guo, Jang-Ting and Krause, Alan (2011a) Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems. Mimeo, University of California, Riverside.Google Scholar
Guo, Jang-Ting and Krause, Alan (2011b) Optimal nonlinear income taxation with habit formation. Journal of Public Economic Theory 13, 463–480.Google Scholar
Guo, Jang-Ting and Krause, Alan (2013) Optimal nonlinear taxation of income and education expenditures. Oxford Economic Papers 65, 74–95.Google Scholar
Kocherlakota, Narayana (2010) The New Dynamic Public Finance. Princeton, NJ: Princeton University Press.Google Scholar
Krause, Alan (2009) Optimal nonlinear income taxation with learning-by-doing. Journal of Public Economics 93, 1098–1110.Google Scholar
Mirrlees, James (1971) An exploration in the theory of optimum income taxation. Review of Economic Studies 38, 175–208.Google Scholar
OECD (2010) Highlights from Education at a Glance 2010. Paris: OECD.Google Scholar
Roberts, Kevin (1984) The theoretical limits to redistribution. Review of Economic Studies 51, 177–195.Google Scholar
Simula, Laurent (2010) Optimal nonlinear income tax and nonlinear pricing: Optimality conditions and comparative static properties. Social Choice and Welfare 35, 199–220.CrossRefGoogle Scholar
Stiglitz, Joseph (1982) Self-selection and Pareto efficient taxation. Journal of Public Economics 17, 213–240.Google Scholar