Journal Article

Dynamic Optimal Taxation with Private Information

Stefania Albanesi and Christopher Sleet

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 73, issue 1, pages 1-30
Published in print January 2006 | ISSN: 0034-6527
Published online January 2006 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2006.00367.x
Dynamic Optimal Taxation with Private Information

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  • Information, Knowledge, and Uncertainy
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We study dynamic optimal taxation in a class of economies with private information. Optimal allocations in these environments are complicated and history-dependent. Yet, we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems. The market structure in these economies is similar to that in Bewley (1986); agents supply labour and trade risk-free claims to future consumption, subject to a budget constraint and a debt limit. Optimal taxes are conditioned only on two observable characteristics—an agent's accumulated stock of claims, or wealth, and her current labour income. We show that optimal taxes are generally non-linear and non-separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences.

Keywords: D82; H21

Journal Article.  13473 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Taxation, Subsidies, and Revenue

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