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Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete MarketsPiero GottardiEuropean University Institute - Department of Economics; Ca Foscari University of Venice - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Atsushi KajiiInstitute of Economic Research, Kyoto University; Singapore Management University Tomoyuki NakajimaKyoto University - Institute of Economic Research August 31, 2011 CESifo Working Paper Series No. 3560 Abstract: We study the dynamic Ramsey problem of finding optimal public debt and linear taxes on capital and labor income within a tractable infinite horizon model with incomplete markets. With zero public expenditure and debt, it is optimal to tax the risky labor income and subsidize capital, while a positive amount of public debt is welfare improving. A steady state optimality condition is derived which implies that the tax on capital is positive, when savings are sufficiently inelastic to returns. A calibration of our model to the US economy indicates positive optimal taxes and a small but positive optimal debt level.
Number of Pages in PDF File: 46 Keywords: incomplete markets, Ramsey equilibrium, optimal taxation, optimal public debt, constrained inefficiency JEL Classification: D520, D600, D900, E200, E620, H210, O400 working papers seriesDate posted: September 5, 2011Suggested CitationContact Information
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