Public spending and optimal taxes without commitment

DOI10.1007/S100580100058MaRDI QIDQ1601997zbMATH OpenOpenAlexFDO

Authors Jess Benhabib, Aldo Rustichini, Andres Velasco

Publication date 4 September 2002

Published in Review of Economic Design (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s100580100058

zbMATH Keywords

distortionary taxthird besttime inconsistency

Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64)

Review text

This paper presents a model of a productive economy that requires public capital. This capital is financed by a distortionary tax. The (second-best) optimal fiscal policy is time inconsistent. This paper computes the (third-best) optimal fiscal policy subject to the requirement of time consistency. Of course, a superior policy would be to replace the distortionary tax by a non-distortionary one.

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Cited in

(12)

• Ramsey fiscal policy and endogenous growth
• On time inconsistency: A technical issue in Stackelberg differential games
• Optimal taxes without commitment
• The time-inconsistency problem of labor taxes and constitutional constraints
• Time-Consistent Public Policy
• Slow Adjustment and the Level of Government Spending
• Intertemporal distortions in the second best
• In praise of wasteful spending
• Time-consistent control in nonlinear models
• Distortionary taxes and public investment when government promises are not enforceable
• Fiscal policy under loose commitment
• Public debt and optimal taxes without commitment

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