Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete Markets

46 Pages Posted: 5 Sep 2011

See all articles by Piero Gottardi

Piero Gottardi

European University Institute - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia; CESifo (Center for Economic Studies and Ifo Institute)

Atsushi Kajii

Institute of Economic Research, Kyoto University; Singapore Management University

Tomoyuki Nakajima

University of Tokyo

Date Written: August 31, 2011

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.

Keywords: incomplete markets, Ramsey equilibrium, optimal taxation, optimal public debt, constrained inefficiency

JEL Classification: D520, D600, D900, E200, E620, H210, O400

Suggested Citation

Gottardi, Piero and Kajii, Atsushi and Nakajima, Tomoyuki, Optimal Taxation and Constrained Inefficiency in an Infinite-Horizon Economy with Incomplete Markets (August 31, 2011). CESifo Working Paper Series No. 3560, Available at SSRN: https://ssrn.com/abstract=1922706

Piero Gottardi (Contact Author)

European University Institute - Department of Economics ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy
+39 041 257 4192 (Phone)
+39 041 257 4176 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Atsushi Kajii

Institute of Economic Research, Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

HOME PAGE: http://www.kier.kyoto-u.ac.jp/~kajii/

Singapore Management University ( email )

School of Economics
90 Stamford Road
Singapore, 178903
Singapore

Tomoyuki Nakajima

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

HOME PAGE: http://https://sites.google.com/view/tomoyukinakajima/home

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
41
Abstract Views
449
PlumX Metrics