Capital Taxation and Ownership When Markets Are Incomplete

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Publication Details

Output type: Journal article

Author list: Farhi E

Publisher: The University of Chicago Press

Publication year: 2010

Journal: Journal of Political Economy (0022-3808)

Volume number: 118

Issue number: 5

Start page: 908

End page: 948

Number of pages: 41

ISSN: 0022-3808

eISSN: 1537-534X

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: http://papers.nber.org/papers/w13390.pdf

Abstract

This paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets. The model features a representative-agent economy with linear taxes on labor and capital. I first allow the government to trade only a real risk-free bond. Optimal policy has the following features: labor taxes fluctuate very little, capital taxes are volatile and feature a positive (negative) spike after a negative (positive) shock to the government budget, and capital taxes average to roughly zero across periods. I then consider the implications of allowing the government to trade capital.

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