A unified framework for optimal taxation with undiversifiable risk

@inproceedings{Panousi2016AUF,
  title={A unified framework for optimal taxation with undiversifiable risk},
  author={Vasia Panousi and Catarina Reis},
  year={2016}
}
This paper considers a model of linear capital taxation for an economy where capital and labor income are subject to idiosyncratic uninsurable risk. To keep the model tractable, we assume that investment decisions are made before uncertainty is realized, so that the realization of the capital income shock only affects current consumption. In this setting, we find that the optimal capital tax is positive in the long run if there is only capital income risk. The reason for this is that the… CONTINUE READING

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