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Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty

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  • Florian Scheuer

Abstract

This paper studies Pareto-optimal risk-sharing arrangements in a private information economy with aggregate uncertainty and ex ante heterogeneous agents. I show how to implement Pareto-optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. The first result is that if aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require any interventions in financial markets. This result can be extended to dynamic settings in the sense that, in this case, only savings need to be distorted, but not trades in financial markets. Second, I characterize optimal trading distortions in financial markets when aggregate and idiosyncratic shocks are not independent. In this case, optimal asset taxes must be higher for those securities that pay out in aggregate states in which consumption is more volatile. For instance, this can provide an efficiency justification for the frequently observed differential tax treatment of different asset classes, such as debt and equity claims.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17817.

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Date of creation: Feb 2012
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Publication status: published as Florian Scheuer, 2013. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 405-420, July.
Handle: RePEc:nbr:nberwo:17817

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  1. Florian Scheuer, 2013. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 405-420, July.
  2. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report, Federal Reserve Bank of Minneapolis 293, Federal Reserve Bank of Minneapolis.
  3. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal Unemployment Insurance over the Business Cycle," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  4. Narayana R. Kocherlakota & Luigi Pistaferri, 2004. "Asset Pricing Implications of Pareto Optimality with Private Information," Levine's Bibliography 122247000000000508, UCLA Department of Economics.
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  7. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  8. Krueger, Dirk & Lustig, Hanno, 2010. "When is market incompleteness irrelevant for the price of aggregate risk (and when is it not)?," Journal of Economic Theory, Elsevier, Elsevier, vol. 145(1), pages 1-41, January.
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  13. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  14. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers, Society for Economic Dynamics 455, Society for Economic Dynamics.
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  17. Mikhail Golosov & Aleh Tsyvinski & Ivan Werning, 2007. "New Dynamic Public Finance: A User's Guide," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 317-388 National Bureau of Economic Research, Inc.
  18. Gabrielle Demange, 2008. "Sharing aggregate risks under moral hazard," PSE Working Papers halshs-00586739, HAL.
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  20. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
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Cited by:
  1. Florian Scheuer, 2012. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," NBER Working Papers 17817, National Bureau of Economic Research, Inc.

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