Time-consistent optimal fiscal policy

Paul Klein, José Víctor Ríos-Rull

Research output: Contribution to journalReview articlepeer-review

50 Scopus citations

Abstract

This article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period's capital income tax rate. We find that the results contrast markedly with those under full commitment. First, capital income tax rates are very high (65% on average versus close to zero on average under full commitment). Second, labor income taxes are rather low on average (about 12% versus a value of around 31% under full commitment). Finally, labor income taxes are quite volatile, whereas under full commitment their standard deviation is essentially zero.

Original languageEnglish (US)
Pages (from-to)1217-1245
Number of pages29
JournalInternational Economic Review
Volume44
Issue number4
DOIs
StatePublished - Nov 2003

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