Begoña Domínguez

Public debt and optimal taxes without commitment

Abstract Benhabib and Rustichini [Optimal taxes without commitment, J. Econ. Theory 77 (1997) 231–259] study the properties of optimal capital taxes in economies without commitment and no government debt. They find that capital taxes may be different from zero at steady state. This note shows that, once governments have the possibility of issuing debt and smoothing taxes over time, optimal steady state capital taxes turn out to be zero.

An evaluation of constitutional constraints on capital taxation

This paper investigates the desirability of constitutional constraints on capital taxation in an environment without government debt and where benevolent governments have limited commitment. In our setup, governments can choose proportional capital and labor income taxes subject to the constitutional constraint but cannot commit to an actual path of taxes. First, we explore a form of constitutional constraint: a constant cap on capital tax rates. In our quantitative exercise, we show that a three percent cap on capital taxes provides the highest welfare at the worst sustainable equilibrium. However, such a cap decreases welfare at the best sustainable equilibrium (both because it constrains feasibility and because it tightens the incentive compatibility constraint). Second, we identify a form of constitutional constraint that can improve all sustainable equilibria. That constraint features a cap on capital taxes that increases with the level of capital.

The Time-Inconsistency Problem of Labor Taxes and Constitutional Constraints

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.

The Effect of Time-Consistent Capital Taxation on Capital Accumulation and Welfare

This paper analyzes the effects of time-consistent capital taxation on the level of capital and welfare. We find that a commitment to a zero capital tax shifts the time inconsistency problem towards labor taxes and the provision of public consumption. By comparing the worst time-consistent policies with and without a commitment to zero capital taxes, we find that the mere existence of a capital tax might lead to capital tax rates that are as high as 90% at steady state and capital stocks that are 84% lower. There the welfare gains of a commitment to zero capital taxes are about 7.4% of initial steady state consumption. At the other end, comparing the best time-consistent policies, we find that the welfare losses of a commitment to zero capital taxes are about 0.9% of consumption.