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 households, the capital income tax will always be positive in steady state. Furthermore, the steady state to which the economy converges is independent of initial conditions. Numerical simulations suggest that as the difference between private and public discounting increases, the level of the steady state capital tax and public debt also become higher.