Optimal vs. time-consistent tax cycles

How does the size of the transfer system evolve in the short and in the long run? We construct a model where taxation is distortionary because it discourages capital accumulation. We compare the Ramsey allocation with the time-consistent allocation. The latter can be interpreted as the outcome of a politico-economic mechanism. A general finding is that the lack of commitment induces too persistent redistribution relative to what would have been chosen by a utilitarian planner under commitment. Another finding is that the standard result that optimal taxes should be "smooth" (possibly, after a finite number of periods) is not robust, and that the commitment solution may exhibit cycles.