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Optimal income taxation without commitment: policy implications of durable goods

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  • Shigeo Morita

    (Fukuoka University)

Abstract

This paper examines the design of non-linear tax policies applied to the consumption of durable goods. These tax policies involve an issue of time inconsistency, which the government can re-optimize its tax policies in the future period based on taxpayers' information revealed in the current period. We consider situations in which the government cannot commit to a future tax policy. If a type of taxpayers is unrevealed and a durable good consumption is complementary to a non-durable good consumption, it is optimal to tax the durable goods consumption of high-income earners and subsidize that of low-income earners. Under the additional assumption that taxpayers' disutility of labor supply is iso-elastic, if a type of taxpayers is revealed, a positive marginal tax rate on high-income earners' durable goods consumption and negative marginal tax rate on low-income earners' durable goods consumption are desirable. These imply that the government should design taxes on durable goods consumption to be progressive and supplement its optimal tax policies.

Suggested Citation

  • Shigeo Morita, 2017. "Optimal income taxation without commitment: policy implications of durable goods," Economics Bulletin, AccessEcon, vol. 37(4), pages 2917-2934.
    • Handle: RePEc:ebl:ecbull:eb-17-00175
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    References listed on IDEAS

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    More about this item

    Keywords

    Commitment; Optimal Taxation; Time consistency;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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