Optimal Taxation without State‐Contingent Debt

Aiyagari, S. Rao; Marcet, Albert; Sargent, Thomas J.; Seppälä, Juha

doi:10.1086/343744

Cited by 389 publications

(386 citation statements)

References 9 publications

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“…For the sake of realism, markets are thus incomplete like in Aiyagari, Marcet, Sargent, and Seppälä (2002). The budget constraint reads:…”

Section: Householdsmentioning

confidence: 99%

“…In particular, I derive a sequence of implementability constraints, following Aiyagari, Marcet, Sargent, and Seppälä (2002). To start, I substitute out prices R t and w t and taxes τ t in the household's budget constraint (2) by using the household's first order conditions (4) and (5), which yields…”

Section: Ecb Working Paper Series No 1308mentioning

confidence: 99%

“…The model builds on Aiyagari, Marcet, Sargent, and Seppälä (2002 to finance an exogenously given and stochastic stream of government consumption. It has access to flat rate taxes on labour income and issues one-period non-state-contingent bonds.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Myopic governments and welfare-enhancing debt limits

Rieth

2014

Journal of Economic Dynamics and Control

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“…For the sake of realism, markets are thus incomplete like in Aiyagari, Marcet, Sargent, and Seppälä (2002). The budget constraint reads:…”

Section: Householdsmentioning

confidence: 99%

Section: Ecb Working Paper Series No 1308mentioning

confidence: 99%

See 1 more Smart Citation

Myopic governments and welfare-enhancing debt limits

Rieth

2014

Journal of Economic Dynamics and Control

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“…4 The micro-founded literature also finds that governments should accumulate claims on the private sector and use the interest revenue to get rid of labor market distortions. In representative-agent models with government commitment, this holds irrespective of whether there is capital accumulation or not and whether asset markets are complete (Chari et al 1994) or incomplete (Aiyagari et al 2002). But with complete markets the planner must set an initial tax on debt to obtain an instantaneous and non-distortionary wealth transfer.…”

Section: Proposition 1 It Is Prudent To Have Precautionary Taxation Amentioning

confidence: 99%

Political economy of prudent budgetary policy

Ploeg

2009

Int Tax Public Finance

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The principles of tax smoothing and public debt management with stochastic shocks to future national income are extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate is high. As a precaution the tax rate is thus set higher and public spending lower to build precautionary buffers. This leads to gradual reductions in debt and debt service over time and thus, depending on political preferences, cuts in taxes or increases in public spending. Prudence offsets the intertemporal spending, tax and debt biases resulting from common-pool distortions. Appointing a strong finance minister with as many voting rights as the spending ministers combined ensures that the intratemporal common-pool distortions of an excessively large public sector are eliminated. A strong and prudent minister of finance can thus offset the impatient profligacy of squabbling spending ministers. However, if voters care about outcomes on election eve, finance ministers are tempted to build excessive precautionary buffers early on to dish out tax cuts and boost spending on election eve. Too much prudence may thus be abused for short-run electoral gains.

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“…There is a long transition of literature that studies optimal fiscal policies focusing on the role of taxation and government debt in response to exogenous shocks to the government budget, beginning with Barro (1979) and Lucas and Stokey (2003) and more recently by Aiyagari and McGrattan (1998) and Aiyagari et al (2002). Another line of literature analyzes the optimal income taxation in a complete market without aggregate risks, including Chamley (1986) and Judd (1985) using an infinitely-lived agent model and Erosa and Gervais (2002) and Garriga (2003) in a life-cycle model.…”

Section: Introductionmentioning

confidence: 99%

Short-run fiscal policy: Welfare, redistribution and aggregate effects in the short and long-run

Kitao

2010

Journal of Economic Dynamics and Control

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This paper quantifies the effects of two short-run fiscal policies, a temporary tax cut and a temporary rebate transfer, that are intended to stimulate economic activity. A reduction in income taxation provides immediate incentives to work and save more, raising aggregate output and consumption. A temporary rebate is mostly saved and increases consumption marginally. Both policies improve the overall welfare of households, and the rebate policy especially benefits low-income households. In the long run, however, the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and reduce output and consumption, causing welfare to deteriorate.

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Optimal Taxation without State‐Contingent Debt

Cited by 389 publications

References 9 publications

Myopic governments and welfare-enhancing debt limits

Myopic governments and welfare-enhancing debt limits

Political economy of prudent budgetary policy

Short-run fiscal policy: Welfare, redistribution and aggregate effects in the short and long-run

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