Optimal taxation in the presence of bailouts

Stavros Panageas

No 15405, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.

JEL-codes: E62 G28 H2 H21 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-mac and nep-pub
Note: AP EFG PE
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Published as “Optimal taxation in the presence of bailouts'', Journal of Monetary Economics, 2010, 57(1), pp. 101-116

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