Publication Type
Journal Article
Version
submittedVersion
Publication Date
2-2016
Abstract
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.
Keywords
optimal linear taxes, incomplete markets, constrained efficiency
Discipline
Economic Theory | Finance
Research Areas
Economic Theory
Publication
Journal of Public Economic Theory
Volume
18
Issue
1
First Page
1
Last Page
28
ISSN
1097-3923
Identifier
10.1111/jpet.12135
Publisher
Wiley
Citation
GOTTARDI, Piero; KAJII, Atsushi; and NAKAJIMA, Tomoyuki.
Constrained Inefficiency and Optimal Taxation with Uninsurable Risks. (2016). Journal of Public Economic Theory. 18, (1), 1-28.
Available at: https://ink.library.smu.edu.sg/soe_research/1800
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/jpet.12135