Dynamic Optimal Taxation with Private Information

52 Pages Posted: 24 Sep 2003

See all articles by Stefania Albanesi

Stefania Albanesi

New York University (NYU) - Leonard N. Stern School of Business; Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Christopher M. Sleet

Carnegie Mellon University - David A. Tepper School of Business

Date Written: August 2003

Abstract

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.

Keywords: Dynamic optimal taxation, private information, income taxes, asset taxes

JEL Classification: D62, H21

Suggested Citation

Albanesi, Stefania and Albanesi, Stefania and Sleet, Christopher M., Dynamic Optimal Taxation with Private Information (August 2003). Available at SSRN: https://ssrn.com/abstract=445763

Stefania Albanesi (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
212-998-0527 (Phone)
212-995-4218 (Fax)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~sa2310/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christopher M. Sleet

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://business.tepper.cmu.edu/display_faculty.aspx?id=244