Author: KRUSELL PER KURUŞÇU BURHANETTIN SMITH ANTHONY A.
Publisher: Routledge Ltd
ISSN: 1016-8737
Source: International Economic Journal, Vol.14, Iss.3, 2000-0, pp. : 1-40
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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 invesment spending as well as on capital and labor income. The model allows for closed form solutions, and welfare comparisions can be made across different taxation system Optical 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 optional to allow the government to use a less than fully restricted set of tax bases. [D6, E6, H2].
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