IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets

  • Acikgoz, Omer

Aiyagari (1995) showed that long-run optimal fiscal policy features a positive tax rate on capital income in Bewley-type economies with heterogeneous agents and incomplete markets. However, determining the magnitude of the optimal capital income tax rate was considered to be prohibitively difficult due to the need to compute the optimal tax rates along the transition path. This paper shows that, in this class of models, long-run optimal fiscal policy and the corresponding allocation can be studied independently of the initial conditions and the transition path. Numerical methods based on this finding are used on a model calibrated to the U.S. economy. I find that the observed average capital income tax rate in the U.S. is too high, the average labor income tax rate and the debt-to-GDP ratio are too low, compared to the long-run optimal levels. The implications of these findings for the existing literature on the optimal quantity of debt and constrained efficiency are also discussed.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/50160/1/MPRA_paper_50160.pdf
File Function: original version
Download Restriction: no

File URL: http://mpra.ub.uni-muenchen.de/53177/1/MPRA_paper_50160.pdf
File Function: revised version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50160.

as
in new window

Length:
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:pra:mprapa:50160
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Tomoyuki Nakajima & Atsushi Kajii & Piero Gottardi, 2011. "Optimal taxation and constrained inefficiency in an in finite-horizon economy with incomplete markets," 2011 Meeting Papers 455, Society for Economic Dynamics.
  2. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  3. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  4. Annette Vissing-Jorgensen & Arvind Krishnamurthy, 2008. "The Aggregate Demand for Treasury Debt," 2008 Meeting Papers 713, Society for Economic Dynamics.
  5. Conesa, Juan Carlos & Kitao, Sagiri & Krueger, Dirk, 2006. "Taxing capital? Not a bad idea after all!," CFS Working Paper Series 2006/21, Center for Financial Studies (CFS).
  6. Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics.
  7. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
  8. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  9. Markus Poschke & Baris Kaymak & Ozan Bakis, 2012. "On the Optimality of Progressive Income Redistribution," 2012 Meeting Papers 837, Society for Economic Dynamics.
  10. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  11. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
  12. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, 02.
  13. Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2014. "Constrained inefficiency and optimal taxation with uninsurable risks," CIGS Working Paper Series 14-002E, The Canon Institute for Global Studies.
  14. Javier Díaz-Giménez & Andrew Glover & José-Víctor Ríos-Rull, 2011. "Facts on the distributions of earnings, income, and wealth in the United States: 2007 update," Quarterly Review, Federal Reserve Bank of Minneapolis.
  15. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Altig, David & Davis, Steve J., 1989. "Government debt, redistributive fiscal policies, and the interaction between borrowing constraints and intergenerational altrusim," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 3-29, July.
  17. Daron Acemoglu & Martin Kaae Jensen, 2012. "Robust Comparative Statics in Large Dynamic Economies," NBER Working Papers 18178, National Bureau of Economic Research, Inc.
  18. Auerbach, Alan J & Kotlikoff, Laurence J, 1987. "Evaluating Fiscal Policy with a Dynamic Simulation Model," American Economic Review, American Economic Association, vol. 77(2), pages 49-55, May.
  19. Yotsuzuka, Toshiki, 1987. "Ricardian equivalence in the presence of capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 411-436, September.
  20. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  21. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, vol. 16(2), pages 151-166, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:50160. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.