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This paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of rst-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates no longer apply. In particular, if the government cannot commit and skill-type information is revealed, it is optimal to distort the high-skill consumers labour supply downwards through a positive marginal tax rate to relax the incentive-compatibility constraint. Alter-natively, if the government cannot commit and skill-type information is concealed, it is optimal to distort the high-skill consumers labour supply upwards to relax the incentive-compatibility constraint, but due to some other factors at work the high-skill consumers marginal tax rate cannot be signed. Our analysis therefore identi es a setting in which a positive marginal tax rate on the highest-skill indi-vidual can be justi…ed, despite its depressing e¤ect on labour supply and wages.

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This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation, or to use linear income taxation, when the government cannot commit to its future tax policy. We consider both two-period and in…nite-horizon settings. Under empirically plausible parameter values, separating income taxation is optimal in the two-period model, whereas linear income taxation is optimal when the time horizon is in…nite. The welfare e¤ects of varying the discount rate, the degree of wage inequality, and the population of high-skill workers are also explored. For realistic changes in these parameters, separating income taxation remains optimal in the two-period formulation, and linear income taxation remains optimal in the in…nite-horizon model.

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This paper provides a new, empirically driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labour income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. Panel Study of Income Dynamics, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0∙6 % and 1∙5 % of aggregate annual consumption, and it captures more than 60 % of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto improving, the welfare gain is nearly as large.

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We consider a canonical dynamic mechanism design problem in which the agent's hidden type follows a Markov chain with a potentially large state space. We first show how the problem can be solved numerically with moderate costs when the Markov chain belongs to a special class we identify, and then argue that this class is flexible enough for the method to be useful in quantitative applications.

Abstract This paper studies the long run properties of intertemporal distortions in a broad class of second best economies. Our unified framework encompasses and extends many well known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: If there exists an allocation that satisfies all constraints and eventually converges to the limiting first best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to frontload distortions for this broad class of environments. A series of applications illustrates the significance of these findings. JEL Classification:E6,H21,H3