Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk

Dirk Krueger, Alexander Ludwig and Sergio Villalvazo

No 38/21, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes capital unless the weight on future generations in the social welfare function is sufficiently high. For logarithmic utility a complete analytical solution of the Ramsey problem exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign depends on the magnitude of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently induces a Pareto-improving transition even if the initial equilibrium capital stock is below the golden rule.

Keywords: Idiosyncratic Risk; Taxation of Capital; Overlapping Generations; Precautionary Saving; Pecuniary Externalities (search for similar items in EconPapers)
JEL-codes: E21 H21 H31 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-gro, nep-mac, nep-pbe, nep-pub and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk (2021)
Working Paper: Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk (2018)
Working Paper: Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk (2018)
Working Paper: Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk (2018)
Working Paper: Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk (2018)
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