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Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets

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  • Piero Gottardi
  • Atsushi Kajii
  • Tomoyuki Nakajima

Abstract

We study the dynamic Ramsey problem of finding optimal public debt and linear taxes on capital and labor income within a tractable infinite horizon model with incomplete markets. With zero public expenditure and debt, it is optimal to tax the risky labor income and subsidize capital, while a positive amount of public debt is welfare improving. A steady state optimality condition is derived which implies that the tax on capital is positive, when savings are sufficiently inelastic to returns. A calibration of our model to the US economy indicates positive optimal taxes and a small but positive optimal debt level.

Suggested Citation

  • Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2011. "Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets," Economics Working Papers ECO2011/18, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2011/18
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Boháček, Radim & Kejak, Michal, 2018. "Optimal government policies in models with heterogeneous agents," Journal of Economic Theory, Elsevier, vol. 176(C), pages 834-858.
    3. Galo Nuño & Carlos Thomas, 2020. "Optimal Monetary Policy with Heterogeneous Agents," CESifo Working Paper Series 8670, CESifo.
    4. Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2016. "Constrained Inefficiency and Optimal Taxation with Uninsurable Risks," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(1), pages 1-28, February.
    5. Omer Acikgoz, 2014. "Transitional Dynamics and Long-Run Optimal Taxation under Incomplete Markets," 2014 Meeting Papers 990, Society for Economic Dynamics.
    6. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
    7. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    8. Alexis Akira Toda, 2015. "Asset Prices and Efficiency in a Krebs Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 957-978, October.
    9. Galo Nuño & Carlos Thomas, 2016. "Optimal monetary policy with heterogeneous agents (Updated September 2019)," Working Papers 1624, Banco de España, revised Sep 2019.

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    More about this item

    Keywords

    incomplete markets; Ramsey equilibrium; optimal taxation; optimal public debt; constrained inefficiency;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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