Political economy of Ramsey taxation

We study the dynamic taxation of capital and labor in the Ramsey model under the assumption that taxes and public good provision are decided by a self-interested politician who cannot commit to policies. We show that, as long as the politician is as patient as the citizens, the Chamley–Judd result of zero long-run taxes holds. In contrast, if the politician is less patient than the citizens, the best (subgame perfect) equilibrium from the viewpoint of the citizens involves long-run capital taxation.

Research Highlights► We study the Ramsey dynamic taxation under political economy constraints. ► Politicians are self-interested and cannot commit. ► If the politician is as patient as the citizens, the Chamley–Judd result of zero capital taxes holds. ► If the politician is less patient than the citizens, best equilibrium has long-run capital taxes.