Income Taxation when Markets are Incomplete
AbstractWe investigate the welfare effects of proportional income taxation in a standard general equilibrium model with incomplete markets (GEI). Formally, our analysis is on the allocative effects of state-contingent income tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully announced before markets open, and they are required to result in an ex-post constrained efficient allocation. Our main result is to show that there do typically exist contingent tax reforms that are Pareto improving. These reforms, acting directly on the asset span, modify private risk sharing opportunities. Thus, unlike most of the GEI literature, the type of policy transmission mechanism considered does not rely on, second order, relative spot prices effects. Yet, the key welfare effects of our tax reforms are substantially equivalent to those induced through changes in relative spot prices, as for example in Geanakoplos-Polemarchakis (1986), Geanakoplos- Magill-Quinzii-Drèze (1990), or in Citanna-Polemarchakis-Tirelli (2001).
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 746.
Date of creation: 20 Dec 2002
Date of revision:
Publication status: Published in Decisions in Economics and Finance 2003.26(2003): pp. 97-128
Incomplete Markets; Efficiency; Tax Reforms; Personal and Capital Income Taxes;
Other versions of this item:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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