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Income taxation when markets are incomplete

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  • Mario Tirelli

Abstract

We investigate the welfare effects of proportional income taxation in a standard general equilibrium model with incomplete markets (GEI). Formally, our analysis is on the allocative effects of state-contingent income tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully announced before markets open, and they are required to result in an ex-post constrained efficient allocation. Our main result is to show that there do typically exist contingent tax reforms that are Pareto improving. These reforms, acting directly on the asset span, modify private risk sharing opportunities. Thus, unlike most of the GEI literature, the type of policy transmission mechanism considered does not rely on, second order, relative spot prices effects. Yet, the key welfare effects of our tax reforms are substantially equivalent to those induced through changes in relative spot prices, as for example in Geanakoplos-Polemarchakis (1986), Geanakoplos- Magill-Quinzii-Drèze (1990), or in Citanna-Polemarchakis-Tirelli (2001).
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  • Mario Tirelli, 2003. "Income taxation when markets are incomplete," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 26(2), pages 97-128, November.
    • Handle: RePEc:spr:decfin:v:26:y:2003:i:2:p:97-128
    DOI: 10.1007/s10203-003-0038-6
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    Cited by:

    1. Elena Mercato & Antonio Villanacci, 2006. "Taxes and money in incomplete financial markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 29(1), pages 23-54, May.
    2. Citanna, A. & Polemarchakis, H.M. & Tirelli, M., 2006. "The taxation of trades in assets," Journal of Economic Theory, Elsevier, vol. 126(1), pages 299-313, January.
    3. Sergio Turner, 2006. "Theory of Demand in Incomplete Markets," Working Papers 2006-07, Brown University, Department of Economics.
    4. Tirelli Mario & Turner Sergio, 2010. "Quantifying the Cost of Risk in Consumption," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-33, July.
    5. Sergio Turner & Norovsambuu Tumennasan, 2006. "Pareto Improving Monetary Policy in Incomplete Markets," Working Papers 2006-04, Brown University, Department of Economics.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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