Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

Piero Gottardi, Atsushi Kajii and Tomoyuki Nakajima

No 21, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

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 effciency (search for similar items in EconPapers)
JEL-codes: D52 H21 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2014-03
New Economics Papers: this item is included in nep-cba and nep-mac
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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 (2015)
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 (2014)
Working Paper: Constrained Inefficiency and Optimal Taxation with Uninsurable Risks (2010)
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