Expenditure taxes,income taxes,and time-inconsistency |
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Institution: | Department of Economics, Georgetown University, Washington, DC 20057, USA |
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Abstract: | Traditional welfare-based comparisons of different tax structures implicitly assume that the government can precommit to its future optimal policy. When optimal tax rates are time- inconsistent, however, such comparisons may be misleading. This paper uses a two-period representative-consumer optimal taxation model to study the implications of time-consistency for the welfare rankings of expenditure and income taxation. I show that the welfare rankings of optimal policies may not be preserved by time-consistent ones. |
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