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Optimal nonlinear taxation of income and savings without commitment
Author(s) -
Brett Craig,
Weymark John A.
Publication year - 2019
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12328
Subject(s) - commit , economics , ratchet effect , microeconomics , government (linguistics) , income tax , optimal tax , econometrics , public economics , ratchet , computer science , chaotic , linguistics , philosophy , management , database
When a government is unable to commit to its future tax policies, information about taxpayers' characteristics revealed by their behavior may be used to extract more taxes from them in the future. We examine the implications of this ratchet effect for the design of redistributive income and savings tax policies in a two‐period model with two types of individuals who only differ in their skill levels. When commitment is not possible, it may be optimal to separate, pool, or partially pool different types in period one. The nature of the distortions to labor supplies and savings are investigated for each of these three regimes. The identification of the optimal regime is investigated numerically.