Optimal income taxation without commitment: policy implications of durable goods

This paper examines the design of a tax policy applied to the consumption of durable goods and labor income. We consider cases wherein the government cannot commit to a tax policy in the second period. If the type of taxpayers is unrevealed, it is optimal to tax the durable goods consumption of a high-income earner and subsidize that of a low-income earner. On the other hand, when the type of taxpayers is revealed, imposing a positive tax rate on a high-income earnerfs durable goods consumption is desirable. This implies that the government should design taxes on durable goods consumption to be progressive and supplement its optimal tax policies.