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Optimal fiscal policy under finite planning horizons

Author

Listed:
  • Euiyoung Jung

    (Universidad de Alicante)

  • Chul-In Lee

    (Seoul National University)

Abstract

We propose a novel framework that revisits the seminal Chamley-Judd zero capital taxation result in light of bounded rationality stemming from a finite policy planning horizon and structural frictions in fiscal institutions. We show a mechanism that generates positive optimal capital taxation in the long run. Our numerical results indicate that the current tax system in the United States could be near-optimal in a constrained environment where policymakers exhibit limited policy planning horizons and imperfect altruism toward household welfare under subsequent governments.

Suggested Citation

  • Euiyoung Jung & Chul-In Lee, 2024. "Optimal fiscal policy under finite planning horizons," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(6), pages 1550-1583, December.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:6:d:10.1007_s10797-024-09845-w
    DOI: 10.1007/s10797-024-09845-w
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    More about this item

    Keywords

    Fiscal policy; Optimal taxation; Institution; Bounded rationality;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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