Public spending and optimal taxes without commitment |
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Authors: | Jess Benhabib Aldo Rustichini Andrés Velasco |
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Institution: | (1) Department ov Economics, University New York, New York, NY 10003-6633, USA(e-mail: jess.benhabib@nyu.edu) , US;(2) Department of Economics, University of Minnesota, 271 19 Avenue South,Minneapolis, MN 55455, USA (e-mail: arust@econ.umn.edu) , US;(3) Kennedy School of Government, Harvard University, MA 02138, USA(e-mail: andres_velasco@harvard.edu) , US |
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Abstract: | We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply
of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government
is time inconsistent. We therefore introduce explicitly the constraint that at no point in time the revision of the original
tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the
difference in tax rate between the second and third best policy for a wide range of parameters. For some of these the difference
between the second and third best tax rates is large, and so are the associated rates of economic growth. |
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