A NORMATIVE ANALYSIS OF CAPITAL INCOME TAXES IN THE PRESENCE OF AGGREGATE RISK

Vidar Christiansen

No 268377, Economic Research Papers from University of Warwick - Department of Economics

Abstract: A simple portfolio model is used to examine the efficiency effects of capital income taxes when the economy faces aggregate risk. To achieve a first best optimum the use of state contingent lump-sum taxes is required. Through the tax policy the riskiness of total consumption is partly assigned to the private consumption and partly to the public consumption. State independent income taxes may generate a misallocation of risk and distort the allocation of resources between assets. The second best optimum, representing a trade-off between these inefficiencies, is characterized. Uniform taxation is shown to be optimal only in very special cases. Finally, the second best optimality rule for public consumption is extended to the case of uncertainty.

Keywords: Financial Economics; Productivity Analysis; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 30
Date: 1990-04-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:268377

DOI: 10.22004/ag.econ.268377

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