Constrained inefficiency and optimal taxation with uninsurable risks

Piero Gottardi, Atsushi Kajii and Tomoyuki Nakajima

No 14-002E, CIGS Working Paper Series from The Canon Institute for Global Studies

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 e ects of these taxes into insurance and distribution e ects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks, 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 a ect 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.

Pages: 25
Date: 2014-01
New Economics Papers: this item is included in nep-dge and nep-pbe
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Related works:
Journal Article: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2016)
Working Paper: Constrained inefficiency and optimal taxation with uninsurable risks (2014)
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2014)
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2010)
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