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Capital income taxation when markets are incomplete

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  • TIRELLI, Mario

Abstract

In this paper we investigate the welfare effects of capital income taxation in a standard one commodity general equilibrium model with incomplete markets (GEI) and production. We consider a competitive economy of two periods with uncertainty over a finite number S of possible states of nature revealed in the second period. One perishable commodity is traded on (S + 1) spot markets, there are 1 1 of consumer types. Securities are equity contracts; claims on second period's returns from production plans which are selected by J firms in the interest of shareholders. The number of such contracts is insufficient to span all possible contingencies; that is we assume that the security markets are incomplete. The central planner is (uniquely) endowed with a system of ad-valorem taxes on corporate dividends. If H is not too large, there exist tax reforms that have positive welfare effects; yet, tax reforms with opposite effects do also exist. This result has implications for the theory of optimal taxation and social discounting.

Suggested Citation

  • TIRELLI, Mario, 2000. "Capital income taxation when markets are incomplete," CORE Discussion Papers 2000011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2000011
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    References listed on IDEAS

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    Cited by:

    1. Sergio Turner & Norovsambuu Tumennasan, 2006. "Pareto Improving Monetary Policy in Incomplete Markets," Working Papers 2006-04, Brown University, Department of Economics.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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