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Working Paper
Should Capital Be Taxed?
We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited
What is the prescription of Ramsey capital taxation in the long run? Aiyagari (1995) addressed the question in a heterogeneous-agent incomplete-markets (HAIM) economy, showing that a positive capital tax should be imposed to implement the so-called modified golden rule (MGR). In deriving the MGR result, Aiyagari (1995) implicitly assumed that the multiplier on the resource constraint of the Ramsey problem converges to a finite positive value in the limit. We first show that this implicit assumption has a strong implication for the shadow price of Ramsey taxation in the limit: it must go to ...
Working Paper
Should Capital Be Taxed?
We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
Working Paper
Implementing the Modified Golden Rule? Optimal Ramsey Capital Taxation with Incomplete Markets Revisited
What is the prescription of Ramsey capital taxation in the long run? Aiyagari (1995) addressed the question in a heterogeneous-agent incomplete-markets (HAIM) economy, showing that a positive capital tax should be imposed to implement the so-called modified golden rule (MGR). This paper revisits the long-standing issue. Working with commonly used separable isoelastic preferences, we show (i) the multiplier on the resource constraint of the Ramsey problem must diverge in the limit if a Ramsey steady state exists, (ii) there is no Ramsey steady state when the elasticity of intertemporal ...
Journal Article
Optimal Capital Taxation and Precautionary Savings
There are multiple reasons to motivate the role of capital taxation in the heterogenous-agent incomplete-markets (HAIM) model. One is the production inefficiency caused by precautionary savings. The other is the wealth redistribution role played by capital taxation. To distinguish between these two reasons, this article uses an analytical tractable HAIM model with a degenerated distribution of wealth while preserving the role of precautionary savings. The degenerated wealth distribution shuts down the distributional role played by capital taxation. Our results show that, with no role to play ...