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Do taxspots matter? A study of optimal tax uncertainty

Author

Listed:
  • Alessandro Citanna

    (New York University Abu Dhabi, UAE)

  • Mich Tvede

    (School of Economics, University of Sheffield, Sheffield S1 4DT, UK)

Abstract

Should the government run an uncertain fiscal policy to finance its liabilities? We call the resulting uncertainty taxspots, and study conditions that make taxspots optimal, and recurrent, in standard Ramsey problems. We show that prudence and market incompleteness play a role in sustaining taxspots, and that equal-treatment randomizations can be decentralized via taxspots even in the absence of financial markets.

Suggested Citation

  • Alessandro Citanna & Mich Tvede, 2024. "Do taxspots matter? A study of optimal tax uncertainty," Working Papers 2024006, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2024006
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, July 2024
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    More about this item

    Keywords

    Ramsey taxation; sunspots; lottery equilibrium;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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