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Author: | Krusell, P. |
Title: | Time-consistent redistribution |
Journal: | European Economic Review
2002 : APR, VOL. 46:4-5, p. 755-769 |
Index terms: | Time consistency Taxation Equilibrium analysis Commitment |
Freeterms: | Redistribution |
Language: | eng |
Abstract: | This paper on macroeconomic theory deals with the following. If the government cares more about workers than about capitalists and taxes capital income to finance redistribution to workers, how are inequality and capital accumulation affected in the long run? Assuming that the government cannot commit to future taxes, a time-consistent equilibrium - differentiable subgame-perfect Markov equilibrium - is characterized. In this equilibrium, the current government in part uses the tax, via capital accumulation, to manipulate future governments into setting lower taxes. The equilibrium has substantially lower taxes on capital income than 100%, even though workers do not save and even though the weight on capitalists in government utility is negligible. |
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