Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-24T13:02:02.227Z Has data issue: false hasContentIssue false
  • English
  • Français

AN EVALUATION OF CONSTITUTIONAL CONSTRAINTS ON CAPITAL TAXATION

Published online by Cambridge University Press:  10 August 2016

Begoña Domínguez  and
Zhigang Feng
Begoña Domínguez*
Affiliation:
The University of Queensland
Zhigang Feng
Affiliation:
University of Illinois at Urbana–Champaign and University of Nebraska at Omaha
*
Address correspondence to: Begoña Domínguez, School of Economics, University of Queensland, Colin Clark Building (39), St Lucia, Brisbane, Queensland 4072, Australia; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

Optimal PolicyRules vs. DiscretionTime Consistency
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 7 , October 2017 , pp. 1519 - 1544
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We would like to thank the editor and two anonymous referees for very helpful comments. We also thank Pedro Gomis-Porqueras, Kenneth Judd, Felix Kübler, and useful comments at several presentations. Zhigang Feng acknowledges financial support from NCCR-FINRISK, and computational support from David Kelly, Zongjun Hu, and CCS at University of Miami. All the remaining errors are ours.

References

REFERENCES

Abreu, Dilip, Pearce, David, and Stacchetti, Ennio (1990) Toward a theory of discounted repeated games with imperfect monotoring. Econometrica 58, 1041–1063.CrossRefGoogle Scholar
Albanesi, Stefania and Armenter, Roc (2012) Intertemporal distortions in the second best. Review of Economic Studies 79, 1271–1307.Google Scholar
Athey, Susan, Atkenson, Andrew, and Kehoe, Patrick J. (2005) The optimal degree of discretion in monetary policy. Econometrica 73, 1431–1475.Google Scholar
Chamley, Christophe (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54, 607–622.Google Scholar
Chari, Varadarajan V. (1988) Time consistency and optimal policy design. Quarterly Review of Federal Reserve Bank of Minneapolis 12, 17–31.Google Scholar
Chari, Varadarajan V., Christiano, Lawrence J., and Kehoe, Patrick J. (1994) Optimal fiscal policy in a business cycle model. Journal of Political Economy 102, 617–652.Google Scholar
Chari, Varadarajan V. and Kehoe, Patrick J. (1990) Sustainable plans. Journal of Political Economy 98, 783–802.Google Scholar
Chari, Varadarajan V. and Kehoe, Patrick J. (1998) Optimal Fiscal and Monetary Policy. Federal Reserve Bank of Minneapolis staff report 251.Google Scholar
Conesa, Juan C. and Domínguez, Begoña (2013) Intangible investment and Ramsey capital taxation. Journal of Monetary Economics 60, 983–995.Google Scholar
Domínguez, Begoña (2007) Public debt and optimal capital taxes without commitment. Journal of Economic Theory 135, 159–170.Google Scholar
Domínguez, Begoña (2010) The Time-Consistency of Government Debt and Institutional Restrictions on the Level of Debt. Manuscript, University of Queensland.Google Scholar
Domínguez, Begoña and Feng, Zhigang (2016) The time-inconsistency problem of labor taxes and constitutional constraints. Dynamic Games and Applications 6 (2), 225–242.Google Scholar
Feng, Zhigang (2015) Time consistent optimal fiscal policy over the business cycle. Quantitative Economics 6, 189–221.Google Scholar
Feng, Zhigang, Miao, Jianjun, Peralta-Alva, Adrian, and Santos, Manuel S. (2014) Numerical simulation of nonoptimal dynamic equilibrium models. International Economic Review 55, 83–110.Google Scholar
Fischer, Stanley (1980) Dynamic inconsistency, cooperation, and the benevolent dissembling government. Journal of Economic Dynamics and Control 2, 93–107.Google Scholar
Gervais, Martin and Mennuni, Alessandro (2015) Optimal fiscal policy in a neoclassical growth model revisited. European Economic Review 73, 1–17.Google Scholar
Judd, Kenneth L. (1985) Redistributive taxation in a simple perfect foresight model. Journal of Public Economics 28, 59–83.Google Scholar
Judd, Kenneth L., Yeltekin, Sevin, and Conklin, James (2003) Computing supergame equilibria. Econometrica 71, 1239–1254.Google Scholar
Juster, F. Thomas and Stafford, Frank P. (1991) The allocation of time: Empirical findings, behavioral models, and problems of measurement. Journal of Economic Literature 29, 471–522.Google Scholar
Klein, Paul, Krusell, Per, and José-Víctor Ríos-Rull (2008) Time-consistent public policy. Review of Economic Studies 75, 789–808.Google Scholar
Kydland, Finn E. and Prescott, Edward C. (1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85, 473–491.Google Scholar
Lucas, Robert E. (1986) Principles of fiscal and monetary policy. Journal of Monetary Economics 17, 117–134.Google Scholar
Lucas, Robert E. (1990) Supply-side economics: An analytical review. Oxford Economic Papers 42, 293–316.Google Scholar
Mankiw, N. Gregory, Weinzierl, Matthew, and Yagan, Danny (2009) Optimal taxation in theory and practice. Journal of Economic Perspectives 23, 147–174.Google Scholar
Martin, Fernando (2010) Markov-perfect capital and labor taxes. Journal of Economic Dynamics and Control 34, 503–521.Google Scholar
Mendoza, Enrique G., Razin, Assaf, and Tesar, Linda L. (1994) Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption. Journal of Monetary Economics 34, 297–323.Google Scholar
Phelan, Christopher and Stacchetti, Ennio (2001) Sequential equilibria in a Ramsey tax model. Econometrica 69, 1491–1518.Google Scholar
Reis, Catarina (2013) Taxation without commitment. Economic Theory 52, 565–588.Google Scholar
Rogoff, Kenneth (1987) Reputational constraints on monetary policy. Carnegie-Rochester Conference Series on Public Policy 26, 141–182.Google Scholar
Sleet, Christopher (1997) Recursive Methods for Solving Credible Government Policy Problems. Mimeo, KSM-MEDS, Northwestern University.Google Scholar
Stockman, David R. (2001) Balanced-budget rules: Welfare loss and optimal policies. Review of Economic Dynamics 4, 438–459.Google Scholar