IDEAS home Printed from
MyIDEAS: Login to save this paper

Tax Reform with Endogenous Borrowing Limits and Incomplete Asset Markets

  • Eva Carceles Poveda

    (Stony Brook University)

  • Arpad Abraham

    (University of Rochester)

Registered author(s):

    This paper studies different income tax reforms in an infinite horizon economy with a progressive labor income tax code, incomplete markets an endogenous borrowing constraints on capital holdings. In particular, it assumes that households can break their trading arrangements by going into financial autarky, in which case they are excluded from future asset trade. The endogenous limits are then determined at the level at which households are indifferent between defaulting and paying back their debt. These limits are significantly different from zero and they get looser with a higher labor income, a property that is consistent with US data on credit limits. The reforms we study area all revenue neutral and they eliminate capital income taxes but they differ in the changes to the labor income tax code. Our results illustrate that a successful reform has to combine the increase in average labor taxes with an increase in the progressivity of the labor income tax code. On the one hand, this reduces the disposable income of the rich, leading to lower savings and to a lower aggregate capital. On the other hand, it allows the poor and middle income households to supply less labor and consume and more after the reform, increasing the aggregate welfare both in the long run an throughout the transition.

    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:
    Download Restriction: no

    Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1196.

    in new window

    Date of creation: 2009
    Date of revision:
    Handle: RePEc:red:sed009:1196
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    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:red:sed009:1196. 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: (Christian Zimmermann)

    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.