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Time Consistent Policy and the Structure of Taxation

Author

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  • Neil Bruce

Abstract

It is now well known that "optimal" government policies may not be time consistent--that is, ex post optimal. Time consistency considerations can be shown to reverse the conclusions about the relative merits of different tax structures that are drawn from Ramsey type analysis. In this paper I show with the help of a simple overlapping generations model that this is the case for the "presumption" that direct taxes, for which tax rates can be made contingent on household characteristics, weakly dominate indirect taxes, which are levied on transactions. The ability of the government, with direct taxation, to levy different tax rates on households in different periods of their life-cycles introduces a time consistency problem that is not present with the "anonymous" tax rates levied under indirect taxation.

Suggested Citation

  • Neil Bruce, 1990. "Time Consistent Policy and the Structure of Taxation," Working Paper 777, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:777
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_777.pdf
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    Cited by:

    1. Robin Boadway & Nicolas Marceau, 1994. "Time inconsistency as a rationale for public unemployment insurance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 1(2), pages 107-126, October.
    2. Boadway, Robin, 1999. "Le rôle de la théorie de l’optimum du second rang en économie publique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 75(1), pages 29-65, mars-juin.

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