Optimal taxation policy in the presence of idiosyncratic risk

Abstract

This paper builds on the analysis of Panousi and Reis of a linear capital taxation model where households face undiversi able capital income risk and labor income risk. It highlights the relevance of consumption taxes in this framework. This paper provides a theoretical and a numerical analysis of the optimal scal policy in response to capital income shocks and labor income shocks. The results show that consumption taxes have the same capa- bility of providing insurance as capital income taxes, without the downside of a¤ecting the households capital decision. In this setting, the consumption tax should be used to reduce the volatility in income and in consumption, and the optimal capital income tax is zero.

Date of Award	18 Jul 2017
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Catarina Reis (Supervisor)