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Optimal taxation in the presence of bailouts

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  • Stavros Panageas

Abstract

The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.

Suggested Citation

  • Stavros Panageas, 2009. "Optimal taxation in the presence of bailouts," NBER Working Papers 15405, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15405
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    Cited by:

    1. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    2. Bálint L. Horváth & Harry Huizinga, 2015. "Does the European Financial Stability Facility Bail Out Sovereigns or Banks? An Event Study," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 177-206, February.
    3. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    4. Priyank Gandhi & Hanno Lustig, 2010. "Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation," NBER Working Papers 16553, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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