By Sarolta Laczo and Raffaele Rossi
http://d.repec.org/n?u=RePEc:qmw:qmwecw:857&r=dge
We characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies. We consider a neoclassical economy where factor income taxation is distortionary within the period, due to endogenous labour and capital utilisation and non-tax-deductibility of depreciation. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies with consumption taxation are remarkably similar to their Ramsey counterparts. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment.
I am getting more and more confused by the optimal tax literature. The reason is that there are so many complete reversals of the results when some assumptions are changed. This paper is one example. If you have a good understanding of this literature, I have a project for you, please contact me.
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