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Optimal Capital Taxation with Idiosyncratic Investment Risk

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  • Catarina Reis

    (Universidade Catolica Portuguesa)

  • Vasia Panousi

    (Federal Reserve Board)

Abstract

We examine the optimal taxation of capital in a Ramsey setting of a general-equilibrium heterogeneous-agent economy with uninsurable idiosyncratic investment or capital-income risk. We fully characterize the optimal tax in the case where there is no safe income in the economy. When the interest rate is allowed to adjust to changes in the capital tax, the optimal capital tax is always constant, even off steady state, and is positive when the variance of risk is higher than the mean return to the risky asset. When the interest rate is exogenously fixed, the optimal capital tax is zero. Therefore, general-equilibrium considerations are crucial for the dynamic effects of capital taxation when investment is risky.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 732.

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Date of creation: 2012
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Handle: RePEc:red:sed012:732

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  1. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  2. Vasia Panousi & Dimitris Papanikolaou, 2011. "Investment, idiosyncratic risk, and ownership," Finance and Economics Discussion Series 2011-54, Board of Governors of the Federal Reserve System (U.S.).
  3. Albanesi, Stefania, 2006. "Optimal Taxation of Entrepreneurial Capital with Private Information," CEPR Discussion Papers 5647, C.E.P.R. Discussion Papers.
  4. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
  5. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  6. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  7. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Sandmo, Agnar, 1977. "Portfolio Theory, Asset Demand and Taxation: Comparative Statics with Many Assets," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 369-79, June.
  9. Ahsan, Syed M., 1976. "Taxation in a two-period temporal model of consumption and portfolio allocation," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 337-352.
  10. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  11. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  12. Mirrlees, J A, 1990. "Taxing Uncertain Incomes," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 34-45, January.
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Cited by:
  1. Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2012. "The properties of income risk in privately held businesses," Finance and Economics Discussion Series 2012-69, Board of Governors of the Federal Reserve System (U.S.).

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