Optimal Taxation without State‐Contingent Debt

By Albert Marcet, Thomas J. Sargent, J. Seppala. Journal of Political Economy, 2002

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In an economy studied by Lucas and Stokey, tax rates inherit the serial correlation structure of government expenditures, belying Barro’s earlier result that taxes should be a random walk for any stochastic process of government expenditures. To recover a version of Barro’s random walk tax‐smoothing outcome, we modify Lucas and Stokey’s economy to permit only risk‐free debt. Having only risk‐free debt confronts the Ramsey planner with additional constraints on equilibrium allocations beyond one imposed by Lucas and Stokey’s assumption of complete markets. The Ramsey outcome blends features of Barro’s model with Lucas and Stokey’s. In our model, the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in Lucas and Stokey’s model, but incomplete markets put a near–unit root component into government debt and taxes, an outcome like Barro’s. However, we show that without ad hoc limits on the government’s asset holdings, outcomes can diverge in important ways from Barro’s. Our results use and extend recent advances in the consumption‐smoothing literature.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/642fb5bff7e8eb84591b401672cac9190f662acc

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Citations in the corpus

Rent seeing distortions and fiscal procyclicality (2011, result): “From a theoretical perspective, this resembles the asymptotic results in Aiyagari et al (2002), where the government eventually accumulates su¢ cient assets to nance required expenditures without the need for distortionary taxation.”
Optimal Fiscal Policy with Redistribution (2007, background): “Recent work featuring incomplete markets include Aiyagari et al. [2002], Werning [2005], and Farhi [2005]. 931 OPTIMAL FISCAL POLICY WITH REDISTRIBUTION”
Optimal maturity of government debt without state contingent bonds (2004, background): “A complete markets Ramsey problem is to choose the allocation fct; xtg(1)t=0 that maximizes utility subject to (1) and subject to the constraint that the allocation can be decentralized as a complete markets competitive equilibrium with income taxes.”
Macroeconomic Effects From Government Purchases and Taxes (2011, unknown): “45 References Aiyagari, R., A. Marcet, T. Sargent, and J. Seppala (2002).”
Sovereign defaults and banking crises (2018, background): “4Demirguc-Kunt and Detragiache (1998) dene as a banking crisis any episode in which at least one of the following criteria is true: (1) The ratio of non-performing assets to total assets in the banking system exceeds 10 percent, (2) The cost of rescue operation was at least 2 percent of GDP, (3) Ba”
The Political Economy of Government Debt (2015, unknown): “They focus on the case in which a social planner would implement the solution by Aiyagari et al. (2002). Battaglini and Coate (2008) link the Baron and Ferejohn (1989) model of bargaining in a legislature with the insight of the literature on strategic debt which we have reviewed above, in particula”
New Dynamic Public Finance: A User's Guide [with Comments and Discussion] (2006, background): “3 Aiyagari et al. [2002] and Werning [2005b] study tax-smoothing of labor income taxes when markets are incomplete. Farhi [2005] studies capital income taxation and ownership in this context.”