Lukyanov, GeorgyORCID: https://orcid.org/0009-0005-1672-610X and Ablyatifov, Emin (2025) Government Reputation in Ramsey Taxation. TSE Working Paper, n. 25-1682, Toulouse

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Abstract

We embed honesty-based reputation into a Ramsey taxation framework with com-petitive firms and households. In a static benchmark with exogenous trust, there is a sharp cutoff below which the optimal policy sets no taxes and above which the optimal tax take rises with trust. In the dynamic model, beliefs evolve through noisy public monitoring of delivered public goods; the planner’s problem is well posed, the value is increasing and convex in beliefs, and optimal revenue is monotone in reputation with a trust threshold that is weakly below the static cutoff. With multiple broad instruments and symmetric monitoring, the dynamic force acts through the total revenue scale; the tax mix is indeterminate along an equivalence frontier. Blackwell-improving monitor-ing and greater type persistence expand the optimal scale and shift the trust threshold inward. The model delivers clear policy prescriptions for building fiscal capacity in low-trust environments and testable links between measured trust, verifiability, and revenue.