Optimal taxation without state-contingent debt

S. Rao Aiyagari, Albert Marcet, Thomas Sargent, Juha Seppälä

    Research output: Contribution to journalArticle

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)1220-1254
    Number of pages35
    JournalJournal of Political Economy
    Volume110
    Issue number6
    DOIs
    StatePublished - Dec 2002

    Fingerprint

    Optimal taxation
    Tax
    Government expenditure
    Debt
    Random walk
    Government deficits
    Government
    Correlation structure
    Government debt
    Consumption smoothing
    Assets
    Stochastic processes
    Near unit root
    Blends
    Tax smoothing
    Serial correlation
    Tax rate
    Ad hoc
    Incomplete markets
    Complete markets

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Aiyagari, S. R., Marcet, A., Sargent, T., & Seppälä, J. (2002). Optimal taxation without state-contingent debt. Journal of Political Economy, 110(6), 1220-1254. https://doi.org/10.1086/343744

    Optimal taxation without state-contingent debt. / Aiyagari, S. Rao; Marcet, Albert; Sargent, Thomas; Seppälä, Juha.

    In: Journal of Political Economy, Vol. 110, No. 6, 12.2002, p. 1220-1254.

    Research output: Contribution to journalArticle

    Aiyagari, SR, Marcet, A, Sargent, T & Seppälä, J 2002, 'Optimal taxation without state-contingent debt', Journal of Political Economy, vol. 110, no. 6, pp. 1220-1254. https://doi.org/10.1086/343744
    Aiyagari SR, Marcet A, Sargent T, Seppälä J. Optimal taxation without state-contingent debt. Journal of Political Economy. 2002 Dec;110(6):1220-1254. https://doi.org/10.1086/343744
    Aiyagari, S. Rao ; Marcet, Albert ; Sargent, Thomas ; Seppälä, Juha. / Optimal taxation without state-contingent debt. In: Journal of Political Economy. 2002 ; Vol. 110, No. 6. pp. 1220-1254.
    @article{6cc959a7b9fc488789698219de06ca43,
    title = "Optimal taxation without state-contingent debt",
    abstract = "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.",
    author = "Aiyagari, {S. Rao} and Albert Marcet and Thomas Sargent and Juha Sepp{\"a}l{\"a}",
    year = "2002",
    month = "12",
    doi = "10.1086/343744",
    language = "English (US)",
    volume = "110",
    pages = "1220--1254",
    journal = "Journal of Political Economy",
    issn = "0022-3808",
    publisher = "University of Chicago",
    number = "6",

    }

    TY - JOUR

    T1 - Optimal taxation without state-contingent debt

    AU - Aiyagari, S. Rao

    AU - Marcet, Albert

    AU - Sargent, Thomas

    AU - Seppälä, Juha

    PY - 2002/12

    Y1 - 2002/12

    N2 - 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.

    AB - 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.

    UR - http://www.scopus.com/inward/record.url?scp=0036997690&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=0036997690&partnerID=8YFLogxK

    U2 - 10.1086/343744

    DO - 10.1086/343744

    M3 - Article

    AN - SCOPUS:0036997690

    VL - 110

    SP - 1220

    EP - 1254

    JO - Journal of Political Economy

    JF - Journal of Political Economy

    SN - 0022-3808

    IS - 6

    ER -