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Dynamic income taxation without commitment: Comparing alternative tax systems

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  • Guo, Jang-Ting
  • Krause, Alan

Abstract

This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation when the government cannot commit to its future tax policy. We also compare the levels of social welfare attainable under these tax systems versus that in the autarkic equilibrium. Both two-period and infinite-horizon settings are considered. Under empirically plausible parameter values, separating taxation is optimal in the two-period model, whereas autarky is optimal when the time horizon is infinite. The effects of varying the degree of wage inequality, the populations of low-skill and high-skill workers, and the discount rate are explored as well. For reasonable changes in these parameters, separating taxation remains optimal in the two-period model, while autarky remains optimal in the infinite-horizon model. Pooling is not optimal in either the two-period or infinite-horizon models for all parameter changes considered.

Suggested Citation

  • Guo, Jang-Ting & Krause, Alan, 2015. "Dynamic income taxation without commitment: Comparing alternative tax systems," Economic Modelling, Elsevier, vol. 47(C), pages 319-326.
    • Handle: RePEc:eee:ecmode:v:47:y:2015:i:c:p:319-326
    DOI: 10.1016/j.econmod.2015.03.008
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    Cited by:

    1. Jang-Ting Guo & Alan Krause, 2018. "Changing social preferences and optimal redistributive taxation," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 73-92.
    2. Guo, Jang-Ting & Krause, Alan, 2015. "Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 101-119.
    3. Marcus Berliant & John O. Ledyard, 2014. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 196-221, April.
    4. Guo, Jang-Ting & Krause, Alan, 2014. "Optimal Dynamic Nonlinear Income Taxation Under Loose Commitment," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1403-1427, September.
    5. Alan Krause, 2017. "On redistributive taxation under the threat of high-skill emigration," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 48(4), pages 845-856, April.
    6. Chen, Yunmin & Guo, Jang-Ting & Krause, Alan, 2020. "The credibility of commitment and optimal nonlinear savings taxation," Journal of Macroeconomics, Elsevier, vol. 65(C).
    7. Shigeo Morita, 2022. "The MCPF under the pandemic," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(5), pages 993-1015, October.
    8. Shigeo Morita & Takuya Obara, 2021. "Public investment criteria under optimal nonlinear income taxation without commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 732-745, August.

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    More about this item

    Keywords

    Dynamic nonlinear income taxation; Commitment;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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