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Optimal taxation in the presence of bailouts

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  • Stavros Panageas

Abstract

The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15405.

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Date of creation: Oct 2009
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Publication status: published as ÔÇťOptimal taxation in the presence of bailouts'', Journal of Monetary Economics, 2010, 57(1), pp. 101-116
Handle: RePEc:nbr:nberwo:15405

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Cited by:
  1. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
  2. Priyank Gandhi & Hanno Lustig, 2010. "Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation," NBER Working Papers 16553, National Bureau of Economic Research, Inc.
  3. Horvath, Balint & Huizinga, Harry, 2011. "Does the European Financial Stability Facility bail out sovereigns or banks? An event study," CEPR Discussion Papers 8661, C.E.P.R. Discussion Papers.

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