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We study optimal taxation in an economy with financial frictions, in which the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. We establish a stark result. Provided this is feasible, optimal policy calls for the government to increase its debt, up to the point at which it provides sufficient liquidity to avoid financial constraints. In this case, capital-income taxes are zero in the long run, and the returns on government debt and capital are equalized. However, if the fiscal space is insufficient, a wedge opens between the rates of return on government debt and capital. In this case, optimal long-run tax policy is driven by a trade-off between the desire to mitigate financial frictions by subsidizing capital and the incentive to exploit the quasi-rents accruing to producers of capital by taxing capital instead. This latter incentive magnifies the wedge between rates of return on government debt and capital. It also makes it optimal to distort downward the interest rate on government debt in periods of high government spending.

This paper makes a fresh attempt at characterizing optimal commodity taxes. Under the usual assumptions, an extremely simple expression of second-best commodity taxes is derived, showing tax rates as functions of observable variables only, rather than as functions of unobservable variables such as compensated cross elasticities. The main formula is independent of special preferences, and independent of the number of commodities. It has a simple economic meaning and could be particularly useful for empirical research. Examples and remarks on the normalization problem are provided.

Author's autograph presentation copy to K. E. Abbot. ; Mode of access: Internet.

We characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies. We consider a neoclassical economy where factor income taxation is distortionary within the period, due to endogenous labour and capital utilisation and non-tax-deductibility of depreciation. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies with consumption taxation are remarkably similar to their Ramsey counterparts. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment.

This paper investigates the role of performance voting in solving the capital levy problem. In a representative democracy, voters can use elections to protect their property by holding politicians accountable for the tax policies they implement. We characterize the set of tax policies that can be sustained by symmetric performance standards & show when this set contains the second-best (Ramsey) tax policy. Appendixes, References. [Copyright 2006 Elsevier B.V.]

This paper develops a theory of optimal taxation with behavioral agents. We use a general framework that encompasses a wide range of biases such as misperceptions and internalities. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities), and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to novel economic insights. We also show how to incorporate nudges in the optimal taxation framework, and jointly characterize optimal taxes and nudges. (JEL D62, D91, H21)

PurposeThe purpose of this paper is to analyze the effect of utility and production externalities on the equilibrium efficiency, and to devise tax policies capable of correcting the distortions caused by the external effects.Design/methodology/approachThe paper analyzes a Ramsey‐type model with utility and production externalities. It compares the decentralized equilibrium in the market economy with the optimal growth path attainable by a central planner.FindingsThe paper shows the effects of utility and production externalities on competitive long‐run equilibrium values. It devises optimal tax policies capable of decentralizing the optimal growth path, and shows how the leisure specification affects the optimal tax policy.Practical implicationsThe paper adds to the literature on optimal taxation, and provides theoretical results that may help policy makers to set the tax policy.Originality/valueThe paper analyzes the equilibrium efficiency in a rather general model with utility externalities, associated with both consumption and leisure, and production externalities. Equilibrium efficiency is studied under the two typical leisure specifications proposed in the literature: home production and raw time. This allows one to analyze the effect that the leisure specification has on the optimal tax policy.

We examine optimum commodity taxation (OCT), including the taxation of non-renewable resources (NRRs), by a government that needs to rely on commodity taxes to raise revenues. NRRs should be taxed at higher rates than otherwise-identical conventional commodities, according to an augmented, dynamic version of the standard Ramsey rule. This rule is compatible with the variety of observed NRR tax systems. OCT of NRRs distorts developed reserves, which are reduced, and their depletion, which is slowed down. We contradict Chamley-Judd conclusion that capital should not be taxed in the long run. Our formulas can directly be used to indicate how Pigovian taxation of carbon NRRs should be increased in the presence of public-revenue needs, as illustrated in a numerical example. We show that NRR substitutes and complements should receive a particular tax treatment. Finally, in a NRR-importing economy, Ramsey NRR taxes are further increased to allow the capture of foreign rents. ; We examine optimum commodity taxation (OCT), including the taxation of non-renewable resources (NRRs), by a government that needs to rely on commodity taxes to raise revenues. NRRs should be taxed at higher rates than otherwise-identical conventional commodities, according to an augmented, dynamic version of the standard Ramsey rule. This rule is compatible with the variety of observed NRR tax systems. OCT of NRRs distorts developed reserves, which are reduced, and their depletion, which is slowed down. We contradict Chamley-Judd conclusion that capital should not be taxed in the long run. Our formulas can directly be used to indicate how Pigovian taxation of carbon NRRs should be increased in the presence of public-revenue needs, as illustrated in a numerical example. We show that NRR substitutes and complements should receive a particular tax treatment. Finally, in a NRR-importing economy, Ramsey NRR taxes are further increased to allow the capture of foreign rents.

This paper studies the role of Ramsey taxation under the assumption that the individual rate of time preference is determined by the publicly provided social level of education. We show how intertemporal complementarities of aggregate human capital can generate multiple equilibria and we examine the role of endogenous fiscal policies in equilibrium selection. Our analysis implies a lower optimal government size due to the effect of human capital on time preference.