Policy Implications of Dynamic Public Finance

Abstract

The dynamic public finance literature underwent significant changes over the past decade. This research agenda has now reached a stage at which it is able to analyze the design of social insurance programs and optimal taxation in rich environments that can be closely matched to microeconomic data. We provide an overview of the recent advances in this literature, discuss the key trade-offs, and explain how the prescriptions for the optimal policy depend on the specific parameters that can be estimated in the data. We also describe the relationship between the dynamic mechanism design approach to optimal taxation and the approach that considers sophisticated tax functions chosen within parametrically restricted classes.