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Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

Piero Gottardi (), Atsushi Kajii and Tomoyuki Nakajima ()

No 694, KIER Working Papers from Kyoto University, Institute of Economic Research

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 effects of these taxes into insurance and distribution effects. 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 affect 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.

Keywords: optimal linear taxes; incomplete markets; constrained efficiency (search for similar items in EconPapers)
JEL-codes: D52 H21 (search for similar items in EconPapers)
Pages: 28pages
Date: 2014-08
New Economics Papers: this item is included in nep-dge and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

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Journal Article: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2016) Downloads
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2015) Downloads
Working Paper: Constrained inefficiency and optimal taxation with uninsurable risks (2014) Downloads
Working Paper: Constrained inefficiency and optimal taxation with uninsurable risks (2014) Downloads
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2014) Downloads
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2010) Downloads
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