The optimal income taxation problem has been extensively studied in one-period
models. This paper analyzes optimal income taxation when consumers work
for many periods. We also analyze what information, if any, that the
government learns about abilities in one period can be used in later periods to
attain more redistribution than in a one-period world. When the government
must commit itself to future tax schedules, intertemporal nonstationarity of
tax schedules could relax the self-selection constraints and lead to Pareto
improvements. The effect of nonstationarity is analogous to that of
randomization in one-period models. The use of information is limited since
only a single lifetime self-selection constraint for each type of consumer
exists. These results hold when individuals and the government have the same
discount rates. The planner can make additional use of the information when
individual and social rates of time discounting differ. In this case, the
limiting tax schedule is a nondistorting one if the government has a lower
discount rate than individuals.
*Published:
Journal of Public Economics, Vol. 44, pp. 15-35, (1991).
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