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Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government

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  • Berliant, Marcus
  • Fujishima, Shota

Abstract

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We show that the sluggish government cannot allow saving or borrowing regardless of the utility function. Moreover, we argue that the zero top marginal tax rate result in static models is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every period.

Suggested Citation

  • Berliant, Marcus & Fujishima, Shota, 2014. "Optimal dynamic nonlinear income taxes: facing an uncertain future with a sluggish government," MPRA Paper 55088, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55088
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Uncertainty, slow government and optimal taxes
      by Economic Logician in Economic Logic on 2013-06-20 19:00:00

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    More about this item

    Keywords

    Optimal income taxation; New dynamic public finance;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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