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Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

Gottardi, Piero and Kajii, Atushi and Nakajima, Tomoyuki (2016) 'Constrained Inefficiency and Optimal Taxation with Uninsurable Risks.' Journal of Public Economic Theory, 18 (1). 1 - 28. ISSN 1097-3923

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Abstract

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two‐period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump‐sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare‐improving.

Item Type: Article
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 18 Sep 2019 12:51
Last Modified: 18 Sep 2019 12:51
URI: http://repository.essex.ac.uk/id/eprint/25367

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