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The New Dynamic Public Finance |
Optimal tax design attempts to resolve a well-known trade-off: namely, that high taxes are bad insofar as they discourage people from working, but good to the degree that, by redistributing wealth, they help insure people against productivity shocks. Until recently, however, economic research on this question either ignored people's uncertainty about their future productivities or imposed strong and unrealistic functional form restrictions on taxes. In response to these problems, the new dynamic public finance was developed to study the design of optimal taxes given only minimal restrictions on the set of possible tax instruments, and on the nature of shocks affecting people in the economy. In this book, Narayana Kocherlakota surveys and discusses this exciting new approach to public finance. An important book for advanced PhD courses in public finance and macroeconomics, The New Dynamic Public Finance provides a formal connection between the problem of dynamic optimal taxation and dynamic principal-agent contracting theory. This connection means that the properties of solutions to principal-agent problems can be used to determine the properties of optimal tax systems. The book shows that such optimal tax systems necessarily involve asset income taxes, which may depend in sophisticated ways on current and past labor incomes. It also addresses the implications of this new approach for qualitative properties of optimal monetary policy, optimal government debt policy, and optimal bequest taxes. In addition, the book describes computational methods for approximate calculation of optimal taxes, and discusses possible paths for future research. Narayana R. Kocherlakota is professor of economics at the University of Minnesota. "Much of the theory of public finance was recently transformed when new work incorporated the subtle interaction of dynamics and risk. Narayana Kocherlakota, one of the top contributors to this new literature, has now given us a masterful exposition of its methods and results. This is a must-read, for graduate students and researchers alike."--Bernard Salanie, Columbia University "This is the first major overview of the new dynamic public finance, and the first summary of the subject that can be used as a graduate textbook or research reference. The book covers all the main areas of the literature, from theoretical developments to numerical implementations and practical applications. It should be a required text for any student who takes an advanced public finance course."--Mikhail Golosov, Yale University Series:
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