Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3560

Classification and Topics

• Classification: Wirtschaft ; Incomplete Markets ; Welfare Economics: General ; Micro-Based Behavioral Economics: General‡ ; Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data) ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Economic Growth and Aggregate Productivity: General
• Subject: incomplete markets ; Ramsey equilibrium ; optimal taxation ; optimal public debt ; constrained inefficiency ; Optimale Besteuerung ; Öffentliche Schulden ; Optimales Wachstum ; Unvollkommener Markt ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gottardi, Piero ; Kajii, Atsushi ; Nakajima, Tomoyuki
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/49512
• Last update: 10.03.2025, 11:42 AM CET