Capital Taxation and Ownership When Markets Are Incomplete

Emmanuel Farhi

Journal of Political Economy, 2010, vol. 118, issue 5, 908 - 948

Abstract: This paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets. The model features a representative-agent economy with linear taxes on labor and capital. I first allow the government to trade only a real risk-free bond. Optimal policy has the following features: labor taxes fluctuate very little, capital taxes are volatile and feature a positive (negative) spike after a negative (positive) shock to the government budget, and capital taxes average to roughly zero across periods. I then consider the implications of allowing the government to trade capital.

Date: 2010
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Working Paper: Capital Taxation and Ownership when Markets are Incomplete (2007)
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