The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsurable, Idiosyncratic Risk
AbstractThis paper poses the following question: Is it possible to improve welfare by increasing taxes and throwing away the revenues? This paper demonstrates that the answer to this question is “yes.” We show that there may be welfare gains from taxing capital income even when the additional capital income tax revenues are wasted or consumed by a selfish government. Previous literature has assumed that government expenditures are exogenous or productive, or allowed for redistribution of tax revenue either via lump-sum transfers, unemployment compensation or other redistributive schemes. In our model a selfish government taxes capital above a given threshold and then consumes the proceeds. This raises the before-tax real return on capital and and thereby enhances the ability of agents to self-insure when they are long-term unemployed and have low savings. Since all agents have positive probability of finding themselves in that state there are cases where all agents prefer a selfish government to no government at all.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-070.
Length: 27 pages
Date of creation: Sep 2006
Date of revision:
capital income tax; selfish government; welfare improvement; redistribution;
Other versions of this item:
- R. Anton Braun & Harald Uhlig, 2006. "The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsurable, Idiosyncratic Risk," CIRJE F-Series CIRJE-F-436, CIRJE, Faculty of Economics, University of Tokyo.
- R. Anton Braun & Harald Uhlig, 2006. "The Welfare Enhancing Effects of a Selfish Government in the Presence of Uninsuarable, Idiosyncratic Risk," CARF F-Series CARF-F-074, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D33 - Microeconomics - - Distribution - - - Factor Income Distribution
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-DGE-2006-09-30 (Dynamic General Equilibrium)
- NEP-MAC-2006-09-30 (Macroeconomics)
- NEP-PBE-2006-09-30 (Public Economics)
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.:
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- Mathias Trabandt & Harald Uhlig, 2006. "How Far Are We From The Slippery Slope? The Laffer Curve Revisited," SFB 649 Discussion Papers SFB649DP2006-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Harald Uhlig & Mathias Trabandt, 2009. "How Far are We from the Slippery Slope? The Laffer Curve Revisited," Working Papers 2009-005, Becker Friedman Institute for Research In Economics.
- Mathias Trabandt & Harald Uhlig, 2010. "How far are we from the slippery slope? The Laffer curve revisited," Working Paper Series 1174, European Central Bank.
- Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
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