The time-inconsistency problem of labor taxes and constitutional constraints

Begona Dominguez and Zhigang Feng (2015) The time-inconsistency problem of labor taxes and constitutional constraints. Dynamic Games and Applications, 6 2: 1-18. doi:10.1007/s13235-015-0149-z


Author Begona Dominguez
Zhigang Feng
Title The time-inconsistency problem of labor taxes and constitutional constraints
Journal name Dynamic Games and Applications   Check publisher's open access policy
ISSN 2153-0785
2153-0793
Publication date 2015-03-31
Sub-type Article (original research)
DOI 10.1007/s13235-015-0149-z
Volume 6
Issue 2
Start page 1
End page 18
Total pages 18
Place of publication Basel, Switzerland
Publisher Springer Basel AG
Language eng
Formatted abstract
This paper investigates the time-inconsistency problem of labor taxes in an economy with balanced-budget policies and no capital taxes. With full commitment, we show that Ramsey labor taxes change with the cost of distortionary taxation and with the cost of not being able to tax capital. We numerically show that these make labor taxes increasing over time. With limited commitment, we find that this time-inconsistency problem leads to underprovision of public consumption. For our baseline parameter values, we find that imposing carefully chosen bounds on labor taxes as constitutional constraints can be optimal. While our proposed bounds sustain the Ramsey as the best sustainable equilibrium, our lower bounds alone or, in combination with some upper bounds, induce higher public consumption and higher welfare in the worst sustainable equilibrium.
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2016 Collection
School of Economics Publications
 
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Created: Mon, 25 Jan 2016, 22:55:07 EST by Begona Dominguez on behalf of School of Economics