IDEAS home Printed from https://ideas.repec.org/p/red/sed016/951.html
   My bibliography  Save this paper

A unified framework for optimal taxation with undiversifiable risk

Author

Listed:
  • Catarina Reis

    (Universidade Católica Portuguesa)

  • Vasia Panousi

    (Board of Governors of the Federal Reserv)

Abstract

This paper considers a model of linear capital taxation for an economy where capital and labor income are subject to idiosyncratic uninsurable risk. To keep the model tractable, we assume that investment decisions are made before uncertainty is realized, so that the realization of the capital income shock only affects current consumption. In this setting, we find that the optimal capital tax is positive in the long run if there is only capital income risk. The reason for this is that the capital tax provides insurance against capital income risk. On the other hand, if there is only labor income risk the optimal capital tax is zero. The sign of the optimal tax is ambiguous if both types of risk are present and depends on the correlation between the two shocks.

Suggested Citation

  • Catarina Reis & Vasia Panousi, 2016. "A unified framework for optimal taxation with undiversifiable risk," 2016 Meeting Papers 951, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:951
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_951.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Vasia Panousi & George-Marios Angeletos, 2007. "Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets," 2007 Meeting Papers 545, Society for Economic Dynamics.
    2. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    3. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-1175, December.
    4. Andrew Atkeson & V. V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Sum), pages 3-17.
    5. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    6. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tom Phelan, 2019. "On the Optimality of Differential Asset Taxation," Working Papers 19-17R, Federal Reserve Bank of Cleveland, revised 01 Sep 2022.
    2. Krueger, Dirk & Ludwig, Alexander & Villalvazo, Sergio, 2021. "Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk," Journal of Public Economics, Elsevier, vol. 201(C).
    3. Corina Boar & Matthew Knowles, 2020. "Entrepreneurship, Agency Frictions and Redistributive Capital Taxation," Discussion Paper Series, School of Economics and Finance 202004, School of Economics and Finance, University of St Andrews.
    4. Thomas Phelan, 2019. "Efficient wealth inequality and differential asset taxation with dynamic agency," 2019 Meeting Papers 1350, Society for Economic Dynamics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vasia Panousi, 2008. "Capital Taxation with Entrepreneurial Risk," 2008 Meeting Papers 36, Society for Economic Dynamics.
    2. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
    3. 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.
    4. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    5. Frédéric Dufourt & Lisa Kerdelhué & Océane Piétri, 2022. "Budget-Neutral Capital Tax Cuts," Annals of Economics and Statistics, GENES, issue 146, pages 93-121.
    6. Nakajima, Makoto, 2020. "Capital income taxation with housing," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    7. Vasia Panousi & Catarina Reis, 2012. "Optimal capital taxation with idiosyncratic investment risk," Finance and Economics Discussion Series 2012-70, Board of Governors of the Federal Reserve System (U.S.).
    8. Dirk Krueger, 2006. "Public Insurance against Idiosyncratic and Aggregate Risk: The Case of Social Security and Progressive Income Taxation," CESifo Economic Studies, CESifo Group, vol. 52(4), pages 587-620, December.
    9. Domeij, David & Heathcote, Jonathan, 2000. "Factor Taxation with Heterogeneous Agents," SSE/EFI Working Paper Series in Economics and Finance 372, Stockholm School of Economics.
    10. YiLi Chien & Junsang Lee, 2016. "Optimal Ramsey Capital Taxation with Endogenous Government Spending," Review, Federal Reserve Bank of St. Louis, vol. 98(4), pages 311-327.
    11. David Domeij & Jonathan Heathcote, 2000. "Capital Versus Labor Taxation with Heterogeneous Agents," Econometric Society World Congress 2000 Contributed Papers 0834, Econometric Society.
    12. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    13. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 965-973, November.
    14. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.
    15. Jonathan Heathcote, 2003. "On the Distributional Effects of Reducing Capital Taxes (previously: Factor Taxation with Heterogeneous Agents)," Working Papers gueconwpa~03-03-22, Georgetown University, Department of Economics.
    16. Biljanovska, Nina & Vardoulakis, Alexandros P., 2019. "Capital taxation with heterogeneous discounting and collateralized borrowing," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 97-109.
    17. Mikhail Golosov & Aleh Tsyvinski, 2007. "Optimal Taxation with Endogenous Insurance Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(2), pages 487-534.
    18. Joseph E. Stiglitz, 2015. "In Praise of Frank Ramsey's Contribution to the Theory of Taxation," Economic Journal, Royal Economic Society, vol. 0(583), pages 235-268, March.
    19. Bonnet, Odran & Chapelle, Guillaume & Trannoy, Alain & Wasmer, Etienne, 2021. "Land is back, it should be taxed, it can be taxed," European Economic Review, Elsevier, vol. 134(C).
    20. Gross, Till & Klein, Paul & Makris, Miltiadis, 2020. "Residence- and source-based capital taxation in open economies with infinitely-lived consumers," Journal of International Economics, Elsevier, vol. 127(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed016:951. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.