We study optimal capital taxation in a limited commitment environment. Our environment consists of a continuum of households with idiosyncratic labor shocks, who have access to a complete contingent claims market. Financial contracts are not perfectly enforceable; as in Kehoe and Levine (1993), enforcement constraints take the form of endogenous debt limits. This market imperfection drives the endogenous discrepancy between the household and planner discount factors: households face the possibility of being debt constrained in the future, and as a result have a higher discount factor than the planner, who does not face such a constraint. In such an economy, the planner will choose an optimal capital level that is lower than that chosen by households; this diÂ¤erence in the choice of capital motivates imposing a positive capital income tax on households to induce them to invest at the socially optimal amount
More papers in 2006 Meeting Papers from Society for Economic Dynamics Address: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA Contact information at EDIRC. Series data maintained by Christian Zimmermann ().