American Economic Review Vol. 105 No. 11 2015

Optimal Taxation and Debt with Uninsurable Risks to Human Capital Accumulation

Piero Gottardi¹; Atsushi Kajii²; Tomoyuki Nakajima³

¹ Department of Economics, European University Institute, Via della Piazzola 43, 50133 Firenze, Italy, and University of Venice (e-mail: ) · ² Institute of Economic Research, Kyoto University, Kyoto, Japan 606-8501, and Singapore Management University (e-mail: ) · ³ Institute of Economic Research, Kyoto University, Kyoto, Japan 606-8501, and Canon Institute for Global Studies (e-mail: )

Abstract

We consider an economy where individuals face uninsurable risks to their human capital accumulation and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks, it is beneficial to tax both labor and capital and to issue public debt. We also assess the quantitative importance of these findings, and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion.

DOI

10.1257/aer.20110576

Volume

105

Issue

11

Pages

3443-3470

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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