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Optimal Taxation and Debt with Uninsurable Risks to Human Capital Accumulation

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  • Piero Gottardi
  • Atsushi Kajii
  • Tomoyuki Nakajima

Abstract

We consider an economy where individuals face uninsurable risks to their human capital accumulation and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks, it is beneficial to tax both labor and capital and to issue public debt. We also assess the quantitative importance of these findings, and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion. (JEL D52, H21, H24, H25, H63, J24)

Suggested Citation

  • Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2015. "Optimal Taxation and Debt with Uninsurable Risks to Human Capital Accumulation," American Economic Review, American Economic Association, vol. 105(11), pages 3443-3470, November.
  • Handle: RePEc:aea:aecrev:v:105:y:2015:i:11:p:3443-70
    Note: DOI: 10.1257/aer.20110576
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    Cited by:

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    2. Yikai Wang & Hans Holter & Marcus Hagedorn, 2015. "The Optimum Quantity of Capital and Debt," 2015 Meeting Papers 1220, Society for Economic Dynamics.
    3. Takumi Motoyama, 2017. "Fiscal sustainability under physical and human capital accumulation in an overlapping generations model," Discussion Papers in Economics and Business 17-05, Osaka University, Graduate School of Economics.
    4. YiLi Chien & Yi Wen, 2020. "Optimal Fiscal Policy under Capital Overaccumulation," Working Papers 2020-002, Federal Reserve Bank of St. Louis, revised 30 Aug 2021.
    5. François Le Grand & Xavier Ragot, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," Sciences Po Economics Discussion Papers 2017-03, Sciences Po Departement of Economics.
    6. Krueger, Dirk & Ludwig, Alexander & Villalvazo, Sergio, 2021. "Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk," Journal of Public Economics, Elsevier, vol. 201(C).
    7. R. Anton Braun & Tomoyuki Nakajima, 2016. "Uninsured risk, stagnation, and fiscal policy," FRB Atlanta Working Paper 2016-4, Federal Reserve Bank of Atlanta.
    8. Yunmin Chen & YiLi Chien & C.C. Yang, 2017. "Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited," Working Papers 2017-003, Federal Reserve Bank of St. Louis, revised 01 Oct 2020.
    9. Marco Bassetto & Wei Cui, 2020. "A Ramsey Theory of Financial Distortions," Working Papers 775, Federal Reserve Bank of Minneapolis.
    10. Darong Dai & Guoqiang Tian & Liqun Liu, 2019. "Optimal Regional Insurance Provision under Privately Observable Shocks," 2019 Meeting Papers 448, Society for Economic Dynamics.
    11. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    12. Anastasios G Karantounias, 2018. "Optimal Fiscal Policy with Recursive Preferences," Review of Economic Studies, Oxford University Press, vol. 85(4), pages 2283-2317.
    13. YiLi Chien & Yi Wen, . "Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    14. Guanlong Ren & John Stachurski, 2018. "Dynamic Programming with Recursive Preferences: Optimality and Applications," Papers 1812.05748, arXiv.org, revised Jun 2020.
    15. Keshab Bhattarai, 2016. "Growth and Income Distributions in Four EU Economies," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(3), pages 263-277, August.
    16. Christian Bayer & Benjamin Born & Ralph Luetticke, 2020. "The Liquidity Channel of Fiscal Policy," CESifo Working Paper Series 8374, CESifo.
    17. Takumi Motoyama, 2019. "Sustainability of public debt under physical and human capital accumulation in an overlapping generations model," Journal of Economics, Springer, vol. 127(1), pages 19-45, June.
    18. YiLi Chien & Yi Wen, 2019. "Don't Tax Capital---Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences," 2019 Meeting Papers 258, Society for Economic Dynamics.
    19. Krebs, Tom & Scheffel, Martin, 2016. "Quantifizierung der gesamtwirtschaftlichen Effekte ausgewählter Reformvorschläge der Studie "Reforms, Investment and Growth: An Agenda for France, Germany and Europe"," Working Papers 16-04, University of Mannheim, Department of Economics.
    20. Ando, Sakai & Matsumura, Misaki, 2020. "Constrained inefficiency of competitive entrepreneurship," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 98-103.
    21. YiLi Chien & Yi Wen, 2017. "Optimal Ramsey Capital Income Taxation —A Reappraisal," Working Papers 2017-24, Federal Reserve Bank of St. Louis.
    22. Tom Krebs & Moritz Kuhn & Mark Wright, 2017. "Under-Insurance in Human Capital Models with Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 121-150, April.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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