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Craig Brett and John A Weymark
''Optimal Nonlinear Taxation of Income and Savings Without Commitment''
When a government is unable to commit to its future tax policies, information about taxpayers' characteristics revealed by their behavior may be used to extract more taxes from them in the future. We examine the implications of this ratchet effect for the design of redistributive income and savings tax policies in a two-period model with two types of individuals who only differ in their skill levels. When commitment is not possible, it may be optimal to separate, pool, or partially pool different types in period one. The nature of the distortions to labor supplies and savings are investigated for each of these three regimes. Novel rationales for savings distortions are identified.
Keywords: asymmetric information, commitment, optimal income taxation, ratchet effect, savings taxation
JEL: H2 - Taxation, Subsidies, and Revenue: General
D8 - Information, Knowledge, and Uncertainty: General
Manuscript Received : Mar 08 2016 Manuscript Accepted : Mar 13 2016

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