We study the role of anonymous markets in which trades cannot be monitored by the government. We adopt a Mirrlees approach to analyze economies in which agents have private information and a benevolent government controls optimal redistributive tax policy. While unrestricted access to anonymous markets reduces the set of policy instruments available to the government, it also limits the scope o...

This paper analyzes optimal progressive capital income taxation in the infinite horizon dynastic model. It shows that progressive taxation is a much more powerful and useful tool to redistribute wealth than linear taxation on which previous literature has focused. We consider progressive capital income tax schedules taking a simple two-bracket form with an exemption bracket at the bottom and a ...

In this paper I show that, in economies characterized by tax evasion and endogeneity of government spending, the qualitative characterization of the optimal factor income taxes depends on both these factors. In particular, the well known Chamley Judd result that, in the long run, tax rates on capital income should be zero is, in many cases, overturned. It is shown that the nature of tax evasion...

Viability theory is the study of dynamical systems that asks “what is the set of initial conditions that generate evolutions, which obey the laws of motion of a system plus other constraints, for the length of the evolution”. We apply viability theory to Judd’s (JPE, 1987) dynamic tax model to identify which economic states are viable, in that the application of annually constrained tax-rate ad...

There is now extensive evidence that individual investors have a strong tendency to invest in domestic rather than foreign equity. This “home bias in portfolios can potentially have important implications for economic behavior and economic policy. For one, it suggests that extra savings in a country will be invested primarily at home, consistent with the evidence for a lack of international cap...

Social values shape policy outcomes. We examine the role of postmaterialism, a widely used concept in the social sciences, for the mix of capital and labour taxation chosen by a society. Following political scientist Inglehart, we define the degree of postmaterialism as the relative importance which individuals or a society as a whole ascribe to non-material values over material things. We inco...

In models with a capital spillover, the market outcome is not Pareto e cient since agents ignore the positive externalities caused by investment. One might conclude that taxes on investment or subsidies to consumption will reduce welfare. However in a model of endogenous growth, either a small tax on capital income, whose proceeds are wasted, increases growth and welfare or a small marginal sub...

This paper shows that there is a presumption that Pareto efficient taxation entails a positive tax on capital. When tax and expenditure policies can affect the market distribution of income, those effects need to be taken into account, reducing the burden imposed on distortionary redistribution. The paper extends the 1976 Atkinson-Stiglitz results to a dynamic, overlapping generations model, co...

Competition among regional governments may lead to suboptimal levels of capital taxation, as governments ignore the external benefits of capital flight to other regions. However, there have been few attempts to quantify the magnitude of the resulting efficiency losses. This paper presents extensive calculations of the efficiency costs over a wide range of parameter scenarios and assumptions abo...

Identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates. Marginal tax rates vary with income, but income surely affects portfolio choice directly. In systems of individual taxation – like Canada’s – couples with the same household income can face different effective tax rates on capital income when labor income is distributed di...