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Markovian Optimal Taxation

Author

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  • Salvador Ortigueira
Abstract
In this paper we study optimal taxation in a dynamic game played by a sequence of governments, one for each time period, and a private sector composed of a continuum of households. We focus on the Markov-perfect equilibrium of this game under two assumptions on the extent of government's intra-period commitment, which in turn define two notions of time consistency of the Markov policy. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment.

Suggested Citation

  • Salvador Ortigueira, 2004. "Markovian Optimal Taxation," 2004 Meeting Papers 315, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:315
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    References listed on IDEAS

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    1. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
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    4. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004. "Time-Consistent Public Expenditures," Levine's Bibliography 122247000000000652, UCLA Department of Economics.
    5. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, vol. 69(6), pages 1491-1518, November.
    6. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(2), pages 263-274.
    7. Dmitry V. Vedenov & Mario J. Miranda, 2001. "Numerical solution of dynamic oligopoly games with capital investment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(1), pages 237-261.
    8. Turnovsky, Stephen J. & Brock, William A., 1980. "Time consistency and optimal government policies in perfect foresight equilibrium," Journal of Public Economics, Elsevier, vol. 13(2), pages 183-212, April.
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    10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Zheng Song, 2011. "The Dynamics of Inequality and Social Security in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 613-635, October.

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    More about this item

    Keywords

    Time-Consistent Optimal Taxation; Markov-Perfect equilibrium; Commitment; Numerical Methods.;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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