Optimal Indirect and Capital Taxation

Golosov, Mikhail; Kocherlakota, Narayana; Tsyvinski, Aleh

doi:10.21034/sr.293

Cited by 104 publications

(162 citation statements)

References 14 publications

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“…Imagine the economy needs to finance an exogenous government expenditure X t ≥ 0 at time t. Then the dynamic Mirrlees program of maximizing the time t = 0 (ex ante) utility of a representative agent, can be written as (e.g. Golosov, Kocherlakota and Tsyvinski, 2003;Kocherlakota, 2005):…”

Section: Separation Of Private and Public Incentivesmentioning

confidence: 99%

“…In addition to these papers, our work is related to the burgeoning literatures on dynamic political economy, 6 and on dynamic non-linear taxation. In particular, our framework incorporates the general model of dynamic non-linear taxation considered in Golosov, Kocherlakota, and Tsyvinski (2003), Kocherlakota (2005), Albanesi and Sleet (2005), and Farhi and Werning (2008). A recent interesting paper by Albanesi and Armenter (2007) studies general structure of intertemporal distortions in a variety of contexts and uses a technique similar to those in this paper in separating aggregate from idiosyncratic distortions.…”

Section: Introductionmentioning

confidence: 99%

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Dynamic Mirrlees Taxation under Political Economy Constraints

Acemoğlu¹,

Golosov

Tsyvinski

2009

Review of Economic Studies

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We study the structure of nonlinear incentive-compatible taxes, in a dynamic economy subject to political economy and commitment problems. In contrast to existing analyses of dynamic and/or nonlinear taxation problems, we relax the assumptions that taxes are set by a benevolent government and that there is commitment to policies. Instead, in our model economy taxes are set by a selfinterested pohtician, without any commitment power. This politician is partly controlled by the citizens via elections. The resulting environment is one of a dynamic mechanism design without commitment.We focus on the best sustainable mechanisrn, which is the mechanism that maximizes the ex ante utilitj' of the citizens. Towards a full characterization of the allocations implied by the best sustainable mechanism, we first prove that a version of the revelation principle applies in our environment and that attention can be restricted to direct truth-telling mechanisms. Using this result, we prove that the provision of incentives to politicians can be separated from the provision of incentives to, and from redistribution, across individuals. This also enables us to develop a method of characterizing the best sustainable mechanism as a, solution to a sta.ndard dyna.mic mechanism design problem subject to additional political economy and commitment constraints formulated only as functions of aggregate variables. Using this formulation, we provide conditions under which distortions created by political economy and commitment problems persist or disappear in the long run. In particular, if politicians are as patient as (or more pa.tient than) the citizens, these distortions disappear asymptotically, and they remain positive otherwise. Finally, we extend our analysis to the case where the government cares both about its own consumption and the future utility of the citizens. This extension generalizes our results to environments where the key constraint is the time-inconsistency of a (partially) benevolent government.

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Section: Separation Of Private and Public Incentivesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Dynamic Mirrlees Taxation under Political Economy Constraints

Acemoğlu¹,

Golosov

Tsyvinski

2009

Review of Economic Studies

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“…4 By assumption lump-sum taxes are not allowed, as usual in the Ramsey approach to optimal fiscal policy. In contrast to the Ramsey approach, Golosov et al (2003) pioneered an alternative approach to dynamic optimal fiscal policy based on the existence of informational asymmetries. In their analysis the set of tax instruments is endogenously determined by the information set available to the fiscal authority.…”

Section: Introductionmentioning

confidence: 99%

Optimal Fiscal Policy in the Design of Social Security Reforms

Conesa

Garriga

2007

SSRN Journal

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______________________________________________________________________The quantitative macroeconomics literature has documented that in the basic Overlapping Generations model a privatization of the social security system, going from a Pay-As-You-Go to a Fully Funded system, generates large long run welfare gains at the cost of substantial welfare losses for initial generations. We propose an alternative to previous literature. In this paper we maximize over the entire policy space, following the optimal fiscal policy approach, rather than comparing alternative policy paths one to one. That is, policies are chosen as part of the optimal design of a social security privatization in a Pareto improving way. The government decides endogenously how to finance the implicit social security liabilities and compensate the initial generations alive during the transition. In contrast with previous analysis the resulting allocation, by construction, lies on the constrained Pareto frontier. We find that the optimal design of reforms exhibits sizeable welfare gains, arising because of the reduction in labor supply distortions. In contrast, the welfare gains coming from the reduction of savings distortions are relatively small.

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“…A related argument for taxing capital income in the presence of uncertain labour income realisations and incomplete markets for risk-sharing is that put forward by Aiyagari (1995). And the recent research falling under the description of the 'new dynamic public finance' has emphasised the role of capital income taxes in relaxing incentive compatibility constraints in models with income shocks where the government wishes to redistribute resources from high-ability individuals (Golosov et al, 2003).…”

Section: Optimal Policy Without Lump-sum Taxationmentioning

confidence: 99%

Taxation and Saving – A Retrospective

Auerbach

2015

The Economic Journal

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Atkinson and Sandmo (1980) evaluated the taxation of saving by embedding the static optimal-tax framework within the two-period overlapping-generations model. Using this model, they collected a series of important results for optimal taxes on labour and capital income under a variety of assumptions regarding the instruments and objectives of the government, in particular the availability of national debt to spread burdens among different generations of individuals. With clear intuition and presentation, the study remains an important source for understanding the welfare implications of the taxation of saving.The 1960s and 1970s saw rapid development in the field of optimal tax analysis, based on and extending a handful of much earlier and fundamental contributions such as Ramsey (1927) and Corlett and Hague (1953). This literature focused primarily on the minimisation of deadweight loss arising from consumption and labour supply distortions in models of linear taxation, although an important extension was the consideration (and general rejection) of production distortions in the work of Diamond and Mirrlees (1971).A separate line of research, on optimal non-linear labour income taxation, commenced with , and the two strands of the literature converged in a heavily cited article by , which developed conditions under which consumption distortions were no longer helpful in improving social welfare in the presence of an optimal non-linear labour income tax. Although many contributions over many years followed, the research of this period largely defined the field of 'static' optimal taxation -static in the sense that time did not play an explicit role in the models used.Of course, one can introduce time into static models in the Arrow-Debreu sense of treating consumption that occurs at different dates as distinct commodities and this approach allowed an interpretation of existing optimal tax results as applying to the taxation of savings. For example, Feldstein (1978) argued in favour of expenditure taxation over income taxation based on the results of . But this is a very limited approach to dynamic analysis, for it ignores important elements of taxation over time, perhaps most notably the existence of different generations who may lack trading opportunities and who may be affected differently by a particular change in tax policy. The article by Atkinson and Sandmo (1980), 'Welfare Implications of the Taxation of Savings', addresses this limitation by embedding the static optimal tax analysis in the classic Diamond (1965) model of overlapping generations.

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Optimal Indirect and Capital Taxation

Cited by 104 publications

References 14 publications

Dynamic Mirrlees Taxation under Political Economy Constraints

Dynamic Mirrlees Taxation under Political Economy Constraints

Optimal Fiscal Policy in the Design of Social Security Reforms

Taxation and Saving – A Retrospective

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