IDEAS home Printed from https://ideas.repec.org/p/sce/scecf4/323.html
   My bibliography  Save this paper

Optimal Capital Tax and Debt Policy Under Incomplete Asset Markets

Author

Listed:
  • Andrew J Scott
  • Arpad Abraham
  • Albert Marcet

Abstract

Two results characterize previous studies of optimal capital income taxation: (i) In order to avoid distorting capital accumulation incentives the ex ante capital tax rate should be set to zero in the long run and ii) by varying the ex post capital tax rate governments may be able to insulate labor taxes from shocks to public finances. This paper explores to what extent these results survive depending on whether the government can issue state-contingent debt and whether state-contingent capital income taxation is possible. We show that although incomplete asset markets with state-contingent capital income taxes can implement the same allocation as complete asset markets, they imply a range and volatility of the capital taxes which is far from similar from what we can observe in the data. The results also confirm the main findings of Marcet and Scott (2003) regarding the counterfactual response of debt to public finance shocks under (effectively) complete markets. Then, we experiment with two more realistic assumptions on tax-setting: uniform income taxation and capital taxes fixed one period ahead. These features together with incomplete asset markets (a one period risk-free bond) lead to more realistic behavior of both government debt and capital income taxes. We also show how the incomplete market problem can be reformulated with the use of the recursive contracts approach and discuss the numerical implementation in detail

Suggested Citation

  • Andrew J Scott & Arpad Abraham & Albert Marcet, 2004. "Optimal Capital Tax and Debt Policy Under Incomplete Asset Markets," Computing in Economics and Finance 2004 323, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:323
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. Gerard Weisbuch & Alan Kirman & Dorothea Herreiner, 1995. "Market Organization," Working Papers 95-11-102, Santa Fe Institute.
    2. Marco Valente and Esben Sloth Andersen, . "A hands-on approach to evolutionary simulation: Nelson and Winter models in the Laboratory for Simulation Development," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV.
    3. Getz, Malcolm & Siegfried, John J. & Zhang, Hao, 1991. "Estimating economies of scale in higher education," Economics Letters, Elsevier, vol. 37(2), pages 203-208, October.
    4. Shu-Heng Chen, John Duffy, Chia-Hsuan Yeh, . "Equilibrium Selection via Adaptation: Using Genetic Programming to Model Learning in a Coordination Game," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV.
    5. Andreas Ortmann & Sergey Slobodyan & Samuel S. Nordberg, 2003. "(The Evolution of) Post-Secondary Education: A Computational Model and Experiments," CERGE-EI Working Papers wp208, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Marco Valente, 1998. "Laboratory for Simulation Development," DRUID Working Papers 98-5, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    7. Marco Valente, . "Comments on the paper Equilibrium Selection via Adaptation: Using Genetic Programming to Model Learning in a Coordination , by Chen, Duffy and Yeh," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV.
    8. Roth, Alvin E & Xing, Xiaolin, 1994. "Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions," American Economic Review, American Economic Association, vol. 84(4), pages 992-1044, September.
    9. Harald Uhlig & Martin Lettau, 1999. "Rules of Thumb versus Dynamic Programming," American Economic Review, American Economic Association, vol. 89(1), pages 148-174, March.
    10. Robert Tamura, 2001. "Teachers, Growth, and Convergence," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1021-1059, October.
    11. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Optimal Capital and Labour Taxation; Incomplete Asset Markets; Recursive Contracts;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    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:sce:scecf4:323. 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: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.