Markets as beneficial constraints on the government |
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Institution: | 1. University of Michigan, United States;2. Internal Revenue Service, United States;3. University of North Carolina at Chapel Hill, United States;4. University of California Berkeley, United States |
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Abstract: | We study the role of anonymous markets in which trades cannot be monitored by the government. We adopt a Mirrlees approach to analyze economies in which agents have private information and a benevolent government controls optimal redistributive tax policy. While unrestricted access to anonymous markets reduces the set of policy instruments available to the government, it also limits the scope of inefficient redistributive policies when the government lacks commitment. Indeed, the restrictions that anonymous markets impose on the optimal fiscal policy, especially on capital taxation and the history-dependence of income taxation, can have positive welfare effects in this case. |
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