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Taxing capital is a good idea: the role of idiosyncratic risk in an OLG model

Author

Listed:
  • Ryoji Hiraguchi

    (Faculty of Economics, Ritsumeikan University)

  • Akihisa Shibata

    (Institute of Economic Research, Kyoto University)

Abstract

We investigate an overlapping generations model (OLG) model in which agents who live for two periods receive idiosyncratic productivity shocks when they are old. We show that a combination of lump-sum and linear capital taxes can always Pareto-improve the allocation, that is, it can raise the equilibrium welfare of one generation without affecting that of the others. As D?vila et al. (Econometrica (2012)) show, a capital reduction in one period raises the welfare levels of agents who are old in that period, but lowers that of the young agents, because it reduces their wages. We show that the government can compensate for these wage losses by additionally taxing the old agents, such that their welfare gains remain positive.

Suggested Citation

  • Ryoji Hiraguchi & Akihisa Shibata, 2013. "Taxing capital is a good idea: the role of idiosyncratic risk in an OLG model," KIER Working Papers 853, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:853
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP853.pdf
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    Cited by:

    1. Jaimes, Richard, 2023. "Does idiosyncratic risk matter for climate policy?," Environment and Development Economics, Cambridge University Press, vol. 28(4), pages 353-367, August.
    2. Tenryu, Yohei, 2017. "Capital Income Tax, Linear R&D Technology, and Economic Growth," MPRA Paper 78706, University Library of Munich, Germany.
    3. Tenryu, Yohei, 2017. "Capital Income Tax, R&D Technology, and Economic Growth," MPRA Paper 123794, University Library of Munich, Germany, revised 27 Feb 2025.
    4. Rieth, Malte, 2017. "Capital taxation and government debt policy with public discounting," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 1-20.

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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