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Public investment criteria under optimal nonlinear income taxation without commitment
Author(s) -
Morita Shigeo,
Obara Takuya
Publication year - 2021
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.12513
Subject(s) - economics , commit , inefficiency , microeconomics , investment (military) , wage , labour economics , income tax , public capital , incentive , capital (architecture) , production (economics) , monetary economics , public economics , public investment , archaeology , database , politics , computer science , political science , law , history
In this study, we highlight that the incredibility of the government's commitment to a certain tax policy is a determinant of production inefficiency. We show that if the government cannot commit to a certain tax policy and if the types of taxpayers are completely separated, then the production efficiency theorem could be violated in an optimal solution. In this case, an incremental unit of public or private capital affects taxpayers' labor supply through wage rates. In a situation where public capital is more (less) complementary to labor than private capital, public investment tightens (relaxes) the incentive compatibility constraint more than private investment.