Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets

Piero Gottardi, Atsushi Kajii and Tomoyuki Nakajima

No ECO2011/18, Economics Working Papers from European University Institute

Abstract: We study the dynamic Ramsey problem of finding optimal public debt and linear taxes on capital and labor income within a tractable infinite horizon model with incomplete markets. With zero public expenditure and debt, it is optimal to tax the risky labor income and subsidize capital, while a positive amount of public debt is welfare improving. A steady state optimality condition is derived which implies that the tax on capital is positive, when savings are sufficiently inelastic to returns. A calibration of our model to the US economy indicates positive optimal taxes and a small but positive optimal debt level.

Keywords: incomplete markets; Ramsey equilibrium; optimal taxation; optimal public debt; constrained inefficiency (search for similar items in EconPapers)
JEL-codes: D52 D60 D90 E20 E62 H21 O40 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete Markets (2011)
Working Paper: Optimal taxation and constrained inefficiency in an in finite-horizon economy with incomplete markets (2011)
Working Paper: Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets (2010)
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