Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101004
Authors: 
Karantounias, Anastasios G.
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2013-7
Abstract: 
I study optimal capital and labor income taxation in a business cycle model with the recursive preferences of Epstein and Zin (1989) and Weil (1990). In contrast to the case of time-additive expected utility, I find that it is no longer optimal to make the welfare cost of distortionary taxes constant over states and dates. This dramatically alters standard taxation prescriptions: optimal policy calls for taxation at the intertemporal margin, variation of taxation at the intratemporal margin, and persistence of labor taxes independent of the stochastic properties of exogenous shocks. Ignoring the distinction between smoothing over time and smoothing over states is not an innocuous assumption for optimal policy.
Subjects: 
Ramsey plan
Epstein-Zin
recursive utility
risk-sensitive preferences
labor tax
capital tax
martingale
JEL: 
D80
E62
H21
H63
Document Type: 
Working Paper

Files in This Item:
File
Size
494.97 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.