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Uninsurable Investment Risks and Capital Income Taxation

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This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.

Published In:

Annals of Finance (1614-2446)
June 2009. Vol. 5, Iss. 3-4, pp. 521-541

Topic(s): Economic models
JEL Code(s): E, E2, E21, E22, E6, E62, G, G3, G32, H, H2, H24, H25