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Tax Policy with Quasi-Geometric Discounting

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  • Krusell Per
  • Kuruscu Burhanettin
  • Anthony Smith

Abstract

We study the effects of tazation in a model with a representative agent with time Inconsistent preferences: discounting is quasi-geometric. Utility is derived from Consumption and leisure, and tazation can be based on consumption and investmentc Spending as well as on capital and labor income. The model allows for closed form Solutions, and welfare comparisons can be made across taxation systems. Optimal taxation analysis in this model leads to time inconsistency issues for the government, assuming that the government shares the consumer's preferences and Cannot commit to future taxes. We study time-consistent policy equilibria for Different tax constitutions. A tax constitution specifies what tax instruments are Available, and we assume that the government can commit to a tax constitution. The Results show that a constitution leaving the government with no ability to tax results in Strictly higher welfare than one where the government has full freedom to tax. Indeed, for some parameter values, the best tax constitution of all is laissez faire (even though the government is benevolent and fully rational). For other parameter values, it may be optimal to allow the government to use a less than fully restricted set of tax bases. [D6,E6,H2]

Suggested Citation

  • Krusell Per & Kuruscu Burhanettin & Anthony Smith, 2000. "Tax Policy with Quasi-Geometric Discounting," International Economic Journal, Taylor & Francis Journals, vol. 14(3), pages 1-40.
    • Handle: RePEc:taf:intecj:v:14:y:2000:i:3:p:1-40
    DOI: 10.1080/10168730000000025
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    References listed on IDEAS

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    1. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 185-199.
    2. Robert J. Barro, 1999. "Ramsey Meets Laibson in the Neoclassical Growth Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1125-1152.
    3. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
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    Cited by:

    1. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers 04-033, Stanford Institute for Economic Policy Research.
    2. Malmendier, Ulrike M. & Della Vigna, Stefano, 2002. "Overestimating Self-Control: Evidence from the Health Club Industry," Research Papers 1880, Stanford University, Graduate School of Business.
    3. Agah R. Turan, 2019. "Intentional time inconsistency," Theory and Decision, Springer, vol. 86(1), pages 41-64, February.

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