Type: Working Paper
Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete Markets
Working Paper, EUI ECO, 2011/18
GOTTARDI, Piero, KAJII, Atsushi, NAKAJIMA, Tomoyuki, Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete Markets, EUI ECO, 2011/18 - http://hdl.handle.net/1814/17218
Retrieved from Cadmus, EUI Research Repository
We study the dynamic Ramsey problem of finding optimal public debt and linear taxes on capital and labor income within a tractable infinite horizon model with incomplete markets. With zero public expenditure and debt, it is optimal to tax the risky labor income and subsidize capital, while a positive amount of public debt is welfare improving. A steady state optimality condition is derived which implies that the tax on capital is positive, when savings are sufficiently inelastic to returns. A calibration of our model to the US economy indicates positive optimal taxes and a small but positive optimal debt level.
Cadmus permanent link: http://hdl.handle.net/1814/17218
Series/Number: EUI ECO; 2011/18