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Title: |
Tax Policy with Quasi-geometric Discounting |
| Author: |
Krusell, Per;
Kuruscu, Burhanettin; Smith, Anthony A., Jr. |
| Author
Affiliation: |
U Rochester;
Carnegie Mellon U |
| Source: |
International Economic Journal, Autumn 2000, v. 14, no. 3, pp. 1-40 |
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Publication Date: |
Autumn 2000 |
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Abstract: |
We study the effects of taxation in a
model with a representative agent with time-inconsistent preferences:
discounting is quasi-geometric. Utility is derived from consumption and
leisure, and taxation can be based on consumption and investment
spending as well as on capital and labor income. The model allows for
closed-form solutions, and welfare comparisons can be made across
different 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. |
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