Social discounting and incentive compatible fiscal policy

This paper considers a Ramsey model of linear capital and labor income taxation in which the government cannot commit ex-ante to a sequence of policies for the future. In this setup, if the government is more impatient than the government, the capital income tax will always be positive in steady state. Thus, impatience and lack of commitment are able to generate positive capital taxes in the long run, although each of these characteristics individually was not. Furthermore, the steady state to which the economy converges is independent of initial conditions. Keywords: Fiscal Policy, Optimal Taxation, Incidence, Debt JEL Classi…cation: E62, H21, H22, H63