According to the theory of tax smoothing, income tax rates should be kept constant so as to minimize the distortionary costs of taxation. By explicitly considering how labor supply is distorted by income taxes in a fully specified intertemporal model, we find that the optimal income tax policy...

Restraints on the public budget may limit the ability of the public sector to use financial markets for the diversification of shocks. This interferes with the role of the public budget as a buffer which may provide insurance by stabilizing income and thereby private consumption. We consider...