Using a stochastic growth model we derive analytic expressions for optimal labour and capital tax rates under both complete and incomplete markets. We find taxes are driven by two factors reflecting : (a) Ramsey efficiency considerations and (b) the financing needs of the government which vary with the excess burden of taxation. In the case of complete markets the government insures against variations in the excess burden of taxation and taxes change purely for efficiency reasons. The serial correlation and volatility of labour taxes are determined by those of employment and do not necessarily imply smooth tax rates. Under incomplete markets both Ramsey considerations and variations in the excess burden of taxation lead to changes in taxes with the latter providing a unit root component to optimal labour taxes. Using US data we find that the majority of fluctuations in marginal tax rates are due to fluctuations in the excess burden of taxation rather than exploitation of Ramsey considerations.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2172.
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook H6 - Public Economics - - National Budget, Deficit, and Debt
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)