Piero Gottardi, Atsushi Kajii, and Tomoyuki Nakajima
Working Paper 2014-24
November 2014
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We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
JEL classification: D52, D60, D90, E20, E62, H21, O40
The authors thank Dirk Krueger and three anonymous referees for very useful comments and suggestions. They also thank Mark Aguiar, Arpad Abraham, Toni Braun, Seung Mo Choi, Hugo Hopenhayn, Selo Imrohoroglu, Young Sik Kim, Robert Lucas, Richard Rogerson, Nancy Stokey, Jaume Ventura, Gianluca Violante, Xiaodong Zhu, and seminar participants at the Canon Institute for Global Studies, Federal Reserve Bank of Atlanta, National Graduate Institute for Policy Studies (GRIPS), Otaru University of Commerce, Seoul National University, the World Congress of the Econometric Society in Shanghai, and the Society for Economic Dynamics in Ghent for helpful comments and discussions. An earlier version of the paper circulated under the title "Optimal Taxation and Constrained Inefficiency in an Infinite Horizon Economy with Incomplete Markets." Kajii and Nakajima gratefully acknowledge financial support from the Japan Society for the Promotion of Science. Gottardi acknowledges support from the European University Institute Research Council. Nakajima gratefully acknowledges the hospitality of the Federal Reserve Bank of Atlanta, where a part of this research was carried out. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Piero Gottardi, Department of Economics, European University Institute, Villa San Paolo, Via della Piazzuola 43, 50133, Florence, Italy, 39-055-4685-919, piero.gottardi@eui.eu; Atsushi Kajii, Institute of Economic Research, Kyoto University, Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, Japan, 81-75-753-7102, kajii@kier.kyoto-u.ac.jp; or Tomoyuki Nakajima, Kyoto University, the Canon Institute for Global Studies, and the Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8166, nakajima@kier.kyoto-u.ac.jp.