Can capital income tax improve welfare in an incomplete market economy with a labor-leisure decision?
AbstractThis paper is a quantitative exercise in the economic analysis of optimal fiscal policy. We look at an incomplete market economy where agents face idiosyncratic labor productivity shocks and borrowing constraints. We find the steady state equilibrium of this economy and then analyze the effect of a government policy introducing a capital income tax and redistributing the proceeds of tax collection back to the agents in the form of a labor subsidy. We find that this type of policy can indeed improve the welfare of the economy, but its quantitative effect is small. We thus conclude that using capital income tax as fiscal policy instrument is not an effective way to cure the problem of market incompleteness.
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Bibliographic InfoArticle provided by Institute of Public Finance in its journal Financial Theory and Practice.
Volume (Year): 30 (2006)
Issue (Month): 1 ()
optimal fiscal policy; incomplete markets; precautionary saving;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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508, Federal Reserve Bank of Minneapolis.
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