Journal Article

Optimal Fiscal Policy with Redistribution

Werning, Iván

2007

Overview

I study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks. Unlike representative-agent Ramsey models, workers are heterogenous and lump-sum taxation is not ruled out. I consider two tax scenarios: (a) linear taxation, with a lump-sum intercept and (b) nonlinear-Mirrleesian taxation. When taxes are linear, I derive a partial-equivalence result with Ramsey settings that provides a reinterpretation of such analyses. I find conditions for perfect tax smoothing oflabor-income taxes and zero capital taxation. Implications that contrast with Ramsey are derived for public-debt management, for the nature of the time-inconsistency problem and for the viability of replicating complete markets without state-contingent bonds. Shifts in the distribution of skills provide a novel source for variations in tax rates. For the nonlinear tax scenario, I show that taxation based on income averages is optimal.

• Publisher: MIT Press,Oxford University Press
• Subject: Bonds / Capital / Consumption taxes / Debt management / Economic models / Fiscal policy / Government spending / Income / Income inequality / Income taxes / Inconsistency / Labor / Lump sum distributions / Lump sum taxation / Optimal taxation / Public debt / Redistribution / Studies / Tax allocation / Tax rates / Taxation