Comment on: 'Optimal Taxation in the Presence of Bailouts'
8 Pages Posted: 7 Jan 2015
Date Written: November 13, 2009
Panageas' "Optimal taxation in the presence of bailouts" provides a model where labor income taxation is used to finance bailouts and bailouts are always optimal. Labor income taxes are countercyclical: they are lower in economic downturns to alleviate the stress on the financial sector and higher in upturns so a bailout can be financed.
I argue that the decision to do a bailout should not be independent of the way the bailout is financed: I discuss moral hazard issues, and redistributive issues associated with taxing labor income to finance a bailout of financial services firms. I conclude discussing alternative ways to deal with the debt overhang problem in the model.
Keywords: bailouts, taxes, labor income
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