Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?

This paper is a quantitative exercise in the economic analysis of optimal fiscal policy. We look at an incomplete market economy where agents face idiosyncratic labor productivity shocks and borrowing constraints. We find the steady state equilibrium of this economy and then analyze the effect of a...

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Main Author: Danijela Medak Fell
Format: Article
Language:English
Published: Institute of Public Finance 2006-03-01
Series:Financial Theory and Practice
Subjects:
Online Access:http://www.ijf.hr/eng/FTP/2006/1/medak-fell.pdf
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spelling doaj-3637023816804b82ad6feff92110db5a2020-11-25T00:53:11ZengInstitute of Public FinanceFinancial Theory and Practice1846-887X1845-97572006-03-013016776Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?Danijela Medak FellThis paper is a quantitative exercise in the economic analysis of optimal fiscal policy. We look at an incomplete market economy where agents face idiosyncratic labor productivity shocks and borrowing constraints. We find the steady state equilibrium of this economy and then analyze the effect of a government policy introducing a capital income tax and redistributing the proceeds of tax collection back to the agents in the form of a labor subsidy. We find that this type of policy can indeed improve the welfare of the economy, but its quantitative effect is small. We thus conclude that using capital income tax as fiscal policy instrument is not an effective way to cure the problem of market incompleteness.http://www.ijf.hr/eng/FTP/2006/1/medak-fell.pdfoptimal fiscal policyincomplete marketsprecautionary saving
collection DOAJ
language English
format Article
sources DOAJ
author Danijela Medak Fell
spellingShingle Danijela Medak Fell
Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
Financial Theory and Practice
optimal fiscal policy
incomplete markets
precautionary saving
author_facet Danijela Medak Fell
author_sort Danijela Medak Fell
title Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
title_short Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
title_full Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
title_fullStr Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
title_full_unstemmed Can Capital Income Tax Improve Welfare in an Incomplete Market Economy with a Labor-Leisure Decision?
title_sort can capital income tax improve welfare in an incomplete market economy with a labor-leisure decision?
publisher Institute of Public Finance
series Financial Theory and Practice
issn 1846-887X
1845-9757
publishDate 2006-03-01
description This paper is a quantitative exercise in the economic analysis of optimal fiscal policy. We look at an incomplete market economy where agents face idiosyncratic labor productivity shocks and borrowing constraints. We find the steady state equilibrium of this economy and then analyze the effect of a government policy introducing a capital income tax and redistributing the proceeds of tax collection back to the agents in the form of a labor subsidy. We find that this type of policy can indeed improve the welfare of the economy, but its quantitative effect is small. We thus conclude that using capital income tax as fiscal policy instrument is not an effective way to cure the problem of market incompleteness.
topic optimal fiscal policy
incomplete markets
precautionary saving
url http://www.ijf.hr/eng/FTP/2006/1/medak-fell.pdf
work_keys_str_mv AT danijelamedakfell cancapitalincometaximprovewelfareinanincompletemarketeconomywithalaborleisuredecision
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