Working Paper: NBER ID: w3265
Authors: Dagobert L. Brito; Jonathan H. Hamilton; Steven M. Slutsky; Joseph E. Stiglitz
Abstract: The optimal income taxation problem has been extensively studied in one-period models. This paper analyzes optimal income taxation when consumers work for many periods. We also analyze what information, if any, that the government learns about abilities in one period can be used in later periods to attain more redistribution than in a one-period world. When the government must commit itself to future tax schedules, intertemporal nonstationarity of tax schedules could relax the self-selection constraints and lead to Pareto improvements. The effect of nonstationarity is analogous to that of randomization in one-period models. The use of information is limited since only a single lifetime self-selection constraint for each type of consumer exists. These results hold when individuals and the government have the same discount rates. The planner can make additional use of the information when individual and social rates of time discounting differ. In this case, the limiting tax schedule is a nondistorting one if the government has a lower discount rate than individuals.
Keywords: Optimal Taxation; Intertemporal Nonstationarity; Government Commitment
JEL Codes: H21; D31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government commitment to future tax schedules (H29) | Pareto improvements (D61) |
| Intertemporal nonstationarity in tax schedules (H31) | Easing self-selection constraints (C24) |
| Different discount rates between government and individuals (H43) | More effective taxation strategies (H26) |
| Government discount rates (E43) | Tax schedules (H25) |
| Information about individual abilities (G53) | Taxation outcomes (H29) |