Optimal tax when the tax is a shock

@jpfeifer Dear Prof Pfeifer, is it possible to analyse the optimal tax if the tax is an exogenous shock? if yes, would you please give some examples? Thanks a lot

I don’t think the question is well-posed. If something is a shock it cannot be controlled by the government. Rather, it must be an instrument the government can use.

That is what I am concerned about. Technically, if the tax rate is a parameter, like those in optimal monetary policy rule, we can do some scenario comparisons. Actually, it is raised by one referee. I am here for help and support.

But what exactly did the referee ask you for? There is a long literature on optimal tax policy.

Explore the optimal tax level, that is.

You need to be more precise. Optimal in what respect? And only a fixed rate? Or a fully state contingent tax rate? With commitment or discretion?

That is why I am confused about the feedback. ‘a more detailed exploration of the optimal levels for the taxes’ is exactly the original words from the referee, but the tax in my model is just an exogenous shock. I wonder if I am asked to generate another model, where I can make it a parameter. I do not know how to reply, so I am trying all to find a solution.

But is there any meaningful trade-off with respect to the tax level? Why should there even be a tax?

From the research topic, yes. I am exploring two fiscal policies, carbon tax and subsidy, so there is trade-off between environment and economic development.

Then the next question is whether you are studying dynamics or steady states.

dynamic, IRFs are the focus

Then that very much sounds like a Ramsey problem where the planner chooses state-contingent tax rate.

Thanks very much for your quick reply, that is what I see from the literature as well.