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Precautionary Savings and Pecuniary Externalities: Analytical Results for Optimal Capital Income Taxation

Author

Listed:
  • Alexander Ludwig

    (Goethe University Frankfurt)

  • Dirk Krueger

    (University of Pennsylvania)

Abstract

We develop an analytically tractable overlapping generations model with idiosyncratic earnings risk to study optimal capital income taxes. We derive simple closed form expressions for optimal taxes along the transition towards a new long-run equilibrium. We emphasize the important interplay between a precautionary savings motive and pecuniary externalities which the planner takes into account when determining optimal taxes.

Suggested Citation

  • Alexander Ludwig & Dirk Krueger, 2016. "Precautionary Savings and Pecuniary Externalities: Analytical Results for Optimal Capital Income Taxation," 2016 Meeting Papers 942, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:942
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