Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177284
Authors: 
Krueger, Dirk
Ludwig, Alexander
Year of Publication: 
2018
Series/Report no.: 
ZEW Discussion Papers 18-014
Abstract: 
We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
Subjects: 
Idiosyncratic Risk
Taxation of Capital
Overlapping Generations
Precautionary Saving
Pecuniary Externality
JEL: 
H21
H31
E21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
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