Optimal Taxation in the Presence of Bailouts

36 Pages Posted: 13 Oct 2009 Last revised: 6 Aug 2010

See all articles by Stavros Panageas

Stavros Panageas

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2009

Abstract

The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.

Suggested Citation

Panageas, Stavros, Optimal Taxation in the Presence of Bailouts (October 2009). NBER Working Paper No. w15405. Available at SSRN: https://ssrn.com/abstract=1486541

Stavros Panageas (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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