Date: 2016
Type: Article
Constrained inefficiency and optimal taxation with uninsurable risks
Journal of public economic theory, 2016, Vol. 18, No. 1, pp. 1-28
GOTTARDI, Piero, KAJII, Atsushi, NAKAJIMA, Tomoyuki, Constrained inefficiency and optimal taxation with uninsurable risks, Journal of public economic theory, 2016, Vol. 18, No. 1, pp. 1-28
- https://hdl.handle.net/1814/61512
Retrieved from Cadmus, EUI Research Repository
When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two-period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump-sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare-improving.
Cadmus permanent link: https://hdl.handle.net/1814/61512
Full-text via DOI: 10.1111/jpet.12135
ISSN: 1097-3923; 1467-9779
Publisher: Wiley
Keyword(s): Incomplete markets Capital income Equilibrium Model
Sponsorship and Funder information:
Inamori Foundation Murata Science Foundation
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