Sovereign debt and redistribution
In this paper Monica Tran-Xuan proposes a theory of external debt sustainability that comes from the motive for redistribution of the government. In particular, having access to external financing allows the government to have more redistribution, measured as the differences in individual utilities, than in financial autarky at the same level of efficiency cost. In the long run, the labor tax needed to redistribute is lower when having access to external borrowing than in financial autarky.
The model can quantitatively account for the recent buildup of external debt in Italy and is consistent with the positive correlation between pre-tax income inequality and external debt across countries and over time.
Redistribution, Sovereign Debt, and Optimal Taxation
Author: Monica Tran-Xuan
From: University at Buffalo
Financial frictions and redistributive capital taxation
In this paper, Boar and Knowles study optimal redistributive capital taxation in a model where taxation affects how efficiently capital is allocated in the economy. They use an overlapping generations model with two types of households: workers and entrepreneurs. New households decide whether to become workers or entrepreneurs while a utilitarian planner sets tax rates to maximize expected utility of new households in the steady state but also taxes capital in order to redistribute from rich entrepreneurs to the poor workers. Entrepreneurs, on the other hand choose how much capital to allocate to a risky technology and how much to allocate to a risk-free technology; are heterogeneous in their productivity levels and lend to one another through financial markets, but these markets are frictional due to an asymmetric information. The effect of the financial friction is that entrepreneurs are limited in their ability to borrow and are unable to fully diversify idiosyncratic risks. Their model indicates:
- It is optimal to tax capital income at a positive rate, because general equilibrium effects on the distribution of capital across entrepreneurs attenuate the negative effects of these taxes on output;
- Optimal wealth taxes are close to zero, since such taxes strongly discourage capital accumulation;
- Optimal tax rates on capital income, wealth and labor income may not be so far from current practice in the United States, where wealth taxes are zero and labor and capital income tax rates are similar.
Entrepreneurship, Agency Frictions and Redistributive Capital Taxation
Authors: Corina Boar, Matthew Knowles
From: New York University, University of Cologne
