Constrained Inefficiency and Optimal Taxation with Uninsurable Risks
AbstractWhen individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two period general equilibrium model with production, we derive a decomposition formula of the welfare eects of these taxes into insurance and distribution eects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks, the degree of heterogeneity among consumers' income as well as on the way in which the tax revenue is used to provide lump sum transfers to consumers. When shocks aect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However in other cases a negative tax on capital is welfare improving.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 694.
Date of creation: Jan 2010
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Other versions of this item:
- Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2010. "Constrained Inefficiency and Optimal Taxation with Uninsurable Risks," Economics Working Papers ECO2010/02, European University Institute.
- NEP-ALL-2010-01-23 (All new papers)
- NEP-DGE-2010-01-23 (Dynamic General Equilibrium)
- NEP-IAS-2010-01-23 (Insurance Economics)
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