Optimal Taxes without Commitment

On this section we introduces lack of commitment to future policies,

government will reoptimize its choices in every period. The choices will be
focused on the government needs for the period it belongs. This generate
distrust in households on the government's commitment in the application of
taxes and the debt default.
Subject to:

MAX : [ U (Ct , Ct , l t)+V (g t )]

t

t =0

Implementability condition:

: t [ U 1 ( t ) C 1t +U 2 C 2t +U l ( t ) l t ] =K
t =0

CONDICION DE FACTIBILIDAD:
1

t :C t +C t + K t +1( 1 ) K t + gt =f ( K t , Lt )

Incentive compatibility constraint:

t s [ U (C1t , C2t ,lt )+V ( g t ) ] W

t =s

Ms
s

( )
Maximum utility of the
households on the worts in
the worst case scenario

Households utility by
the government
policies without

Ramsay Taxation characterization without Commitment

RS

L = U ( Ct ,C t ,l t ) +V ( gt ) + [ U 1 ( t ) C t +U 2 C t +U l ( t ) l t ] + t [ f ( K t , Lt ) Ct Ct K t+1 + ( 1 ) K t
t=s

t =0

The following derivatives are the caractization of the solution for the Ramsay
Taxation Commitment:
t

L Rs t
= U 1 ( t ) + t [ U 11 ( t ) C 1t + U 1 ( t ) ] + t s U 1 ( t ) s t=0
1
C t
s=1
(1)

Rs

( t s U 2 ( t )W 1 ) st =0

L
= t U 2 ( t )+ t [ U 22 (t ) C2t +U 2 ( t ) ]+
2
Ct
s=1
t

L Rs t ( )
= U l t + t [ U ( t ) l t +U l ( t ) ]+ t s U l ( t ) s+ t (t ) =0
l t
s=1
..(3)

LRs
=t + t +1 [ f k ( t +1 ) +( 1 ) ] =0
k t +1
(4)
Rs

.(2)

L
t
ts
= V g ( t ) + V g ( t ) st =0
gt
s=1
(5)