DP4006 Dynamic Optimal Taxation with Private Information

Author(s): Stefania Albanesi, Christopher Sleet
Publication Date: August 2003
Keyword(s): asset taxes, dynamic optimal taxation, E82, income taxes, private information
JEL(s): D62, H21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4006

We study dynamic optimal taxation in a class of economies with private information. Constrained optimal allocations in these environments are complicated and history-dependent. Yet, we show that they can be attained as competitive equilibria in market economies supplemented with simple tax systems. The market structure in these economies is identical to that in Bewley (1986): agents can trade current consumption and risk-free claims to future consumption, subject to a budget constraint and a debt limit. The tax system describes additional transfers that the agents must make to the government. It conditions them upon only two observable characteristics of an agent: their accumulated stock of claims, or wealth, and their current labour income. It implies optimal tax functions that are not additively separable in these variables. The marginal wealth tax is negatively correlated with income and its expected value is generally positive. The marginal income tax is decreasing in wealth.