TIME CONSISTENT TAXATION BY A GOVERNMENT WITH REDISTRIBUTIVE GOALS

In a dynamic economy whose government is interested in both equity and efficiency, time consistency problems arise even if the government ha s access to nondistortionary tax instruments. Moral hazard in producti on leads to a non-degenerate distribution of income, which the governm ent would like to ''flatten'' ex post. Self-enforcing social agreement s can mitigate the tendency toward excessive redistribution. We invest igate the nature of the distortions caused by the time consistency pro blem, and show that in the constrained-optimal equilibrium, usually a linear tax schedule is imposed. This remains true if renegotiation of the social agreement is possible. (C) 1997 Academic Press.