Abstract

This paper examines a dynamic model of nonlinear income taxation in which the government cannot commit to its future tax policy, and individuals are quasi-hyperbolic discounters who cannot commit to future consumption plans. The gov-ernment uses its taxation powers to maximise a utilitarian social welfare function which reects individualstrue (long-run) preferences. Under …rst-best taxation, quasi-hyperbolic discounting has no e¤ect on the level of social welfare attain-able. Under second-best taxation, quasi-hyperbolic discounting increases (resp. decreases) the level of social welfare attainable when separating (resp. pooling) taxation is optimal. The e¤ects of quasi-hyperbolic discounting on the optimal marginal tax rates applicable to labour and savings income are also explored.