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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.Time inconsistency of tax policy is shown to arise in a setting where households differ in their ability to accumulate wealth and where the government has redistributional objectives. It is assumed that wealth accumulation takes the form of human capital acquired through education. The government is precluded from redistributing to a first-best optimum by a selfselection constraint. The second-best is shown to be time-inconsistent. In the time-consistent optimum, households underinvest in education. An argument can be made for public intervention in the provision of education. ? The London School of Economics and Political Science 1996 This content downloaded from 198.101.234.89 on Fri, 12 Jun 2015 17:12:48 UTC All use subject to JSTOR Terms and Conditions ECONOMICA [MAY Obstfeld (1988), a requirement for time inconsistency of dynamic policy is that the planner does not have enough instruments to implement the first-best optimum.There are two general reasons why first-best optimal policies are not attainable. One is that the planner is restricted to using distortionary policy instruments, such as taxes. In a dynamic setting, second-best tax policies generally will not be time-consistent so that the second-best allocation cannot, in fact, be implemented. Much of the analysis of time inconsistency in public finance has been in this context. The seminal paper is that of Fischer (1980), who showed how time inconsistency can arise in an economy consisting of a representative household with a two-period life-cycle. The household takes a savingconsumption decision in the first period, and finances second-period consumption from capital income and variable labour earnings. The government can tax labour and capital incomes in the second period to finance variable public expenditures. From an ex ante point of view, both capital and labour income taxes are distortionary, and the second-best optimal tax scheme will generally include a mix of both types. However, once the household has taken its saving decision, capital income becomes fixed, and the government entering the second period will have an ex post incentive to generate as much of its tax revenue as possible from a capital income tax. In the time-consistent equilibrium, the capital income tax will be too high and the capital stock too low, so welfare is lower than in the second-best optimal tax equilibrium. This analysis has been extended to slightly more general settings and tax instruments by Rogers (1987), Bruce (1990) and Persson and Tabellini (1990).The Fischer example involves time inconsistency resulting from the use of distortionary taxes. As he argues, if lump-sum taxes were available so that the first-best dynamic path could ...

We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are then left to set revenuemaximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger expected global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross-country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.

Regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs. The redistributive goal of regional governments is to support the disabled, who cannot work. Able individuals may work, be involuntary unemployed because of frictions in the labor market, or choose to be voluntary unemployed. Labor force participation decisions depend on regional redistributive policies. Both the size of workforce and tax on firms affect profits and therefore, firms’ location decisions. Allowing regions to engage in tax competition may be efficient. If regions cannot tax firms, they compete by implementing inefficient redistributive policies.