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On the optimality of Ramsey taxes in Mirless economies

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  • Borys Grochulski

Abstract

In this paper, we show that a simple, linear capital tax— the kind used in the Ramsey analysis— can be optimal in a Mirrlees economy with private information. We extend the Mirrlees approach to optimal taxation by studying taxes side-by-side with another institution, rather than in isolation. We consider an implementation in which agents use unsecured credit and personal bankruptcy to obtain insurance. Taxes are levied to fund government expenditures. An optimal tax system consists of lump-sum taxes and a simple Ramsey tax on wealth. In Mirrlees private information environments, optimal capital taxes do not have to be complicated.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 10-14.

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Date of creation: 2010
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Handle: RePEc:fip:fedrwp:10-14

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Keywords: Financial markets ; Financial institutions ; Bankruptcy;

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  1. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  2. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  3. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  4. Narayana Kocherlakota & Borys Grochulski, 2008. "Nonseparable Preferences and Optimal Social Security Systems," 2008 Meeting Papers 16, Society for Economic Dynamics.
  5. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  6. Borys Grochulski, 2010. "Optimal Personal Bankruptcy Design under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 350-378, April.
  7. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  8. Carlos E. da Costa & Iván Werning, 2008. "On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 82-112, 02.
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