On the Non-Existence of a Zero-Tax Steady State with Incomplete Asset Markets

Tomoyuki Nakajima and Shuhei Takahashi

No 1025, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Previous analyses suggest that a government can finance its expenditure by only using its asset income without taxes in the long run. We show that uninsured idiosyncratic earnings risk may overturn this result. In an Aiyagari-type model, we theoretically show that increasing government assets eventually decreases the interest rate below zero, suggesting an upper bound on government asset income. Hence, when government expenditure exceeds a threshold, there exists no zero-tax steady-state equilibrium, and the zero-tax policy is infeasible. Quantitatively, a government can raise small revenues without taxes. Increasing government assets may also generate rational asset price bubbles.

Keywords: Government assets; Equilibrium existence; Zero taxes; Bubbles; Incomplete markets; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: D52 E62 H63 (search for similar items in EconPapers)
Pages: 21pages
Date: 2020-03
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
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