Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

2 Issues per year


IMPACT FACTOR 2017: 0.378
5-year IMPACT FACTOR: 0.462

CiteScore 2017: 0.62

SCImago Journal Rank (SJR) 2017: 0.553
Source Normalized Impact per Paper (SNIP) 2017: 0.605

Online
ISSN
1935-1690
See all formats and pricing
More options …

Optimal taxation under equilibrium unemployment and economic profits

Wei Jiang
Published Online: 2018-10-12 | DOI: https://doi.org/10.1515/bejm-2017-0226

Abstract

This paper develops a heterogeneous agent model with equilibrium unemployment and economic profits due to productive public investment. We find that the presence of profits plays an important role in the determination of long-run optimal tax policy. The Judd-Chamley optimal zero capital tax result can still hold in the model without profits. In this case, the optimal labour wedge is zero in the long run, resulting in welfare gains for all agents and no conflict of interests between agents. But the Benthamite government chooses to subsidise capital income in the long run in the model with economic profits. The resulting labour wedge is non-zero which generates welfare losses of workers despite welfare gains of capitalists. The government also faces a trade-off between efficiency and equity in this case.

Keywords: economic profits; equilibrium unemployment; household heterogeneity; optimal taxation

JEL Classification: E13; E22; E62

References

  • Ahmed, S. 1986. “Temporary and Permanent Government Spending in an Open Economy: Some Evidence for the UK.” Journal of Monetary Economics 17 (2): 197–224.CrossrefGoogle Scholar

  • Ai, C., and S. Cassou. 1995. “A Normative Analysis of Public Capital.” Applied Economics 27 (12): 1201–1209.CrossrefGoogle Scholar

  • Ambler, S., and A. Paquet. 1996. “Fiscal Spending Shocks, Endogenous Government Spending, and Real Business Cycles.” Journal of Economic Dynamics and Control 20 (1–3): 237–256.CrossrefGoogle Scholar

  • Angelopoulos, K., S. Asimakopoulos, and J. Malley. 2017. “The Optimal Distribution of the Tax Burden Over the Business Cycle.” Macroeconomic Dynamics. DOI: .CrossrefGoogle Scholar

  • Angelopoulos, K., J. Malley, and A. Philippopoulos. 2011. “Time-Consistent Fiscal Policy Under Heterogeneity: Conflicting or Common Interests?” CESifo Working Paper Series: 3444, CESifo Group Munich.Google Scholar

  • Ardagna, S. 2001. “Fiscal Policy Composition, Public Debt, and Economic Activity.” Public Choice 109 (3–4): 301–325.CrossrefGoogle Scholar

  • Ardagna, S. 2007. “Fiscal Policy in Unionized Labor Markets.” Journal of Economic Dynamics and Control 31 (5): 1498–1534.CrossrefGoogle Scholar

  • Arsenau, D., and S. Chugh. 2012. “Tax Smoothing in Frictional Labor Markets.” Journal of Political Economy 120 (5): 926–985.CrossrefWeb of ScienceGoogle Scholar

  • Aschauer, A. 1985. “Fiscal Policy and Aggregate Demand.” American Economic Review 75 (1): 117–127.Google Scholar

  • Aschauer, A. 1989. “Is Public Expenditure Productive?” Journal of Monetary Economics 23 (2), 177–200.Google Scholar

  • Aschauer, A., and J. Greenwood. 1985. “Macroeconomic Effects of Fiscal Policy.” Carnegie-Rochester Conference Series on Public Policy 23: 91–138.CrossrefGoogle Scholar

  • Asimakopoulos, S., and P. Asimakopoulos. 2017. “Fiscal Policy with Banks and Financial Frictions.” Journal of Financial Stability. DOI: .CrossrefGoogle Scholar

  • Baier, S., and G. Glomm. 2001. “Long-Run Growth and Welfare Effects of Public Policies with Distortionary Taxation.” Journal of Economic Dynamics and Control 25 (12): 2007–2042.CrossrefGoogle Scholar

  • Barro, J. 1981. “Output Effects of Government Purchases.” Journal of Political Economy 89 (6): 1086–1121.CrossrefGoogle Scholar

  • Barro, J. 1989. “The Neoclassical Approach to Fiscal Policy.” Modern Business Cycle Theory, Cambridge, Massachusetts: Harvard University Press.Google Scholar

  • Burnside, C., M. Eichenbaum, and J. Fisher. 2003. “Fiscal Shocks and Their Consequences.” Journal of Economic Theory 115 (1): 89–117.Google Scholar

  • Chamley, C. 1986. “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives.” Econometrica 54 (3): 607–622.CrossrefGoogle Scholar

  • Chari, V., C. Lawrence, and P. Kehoe. 1994. “Optimal Fiscal Policy in a Business Cycle Model.” Journal of Political Economy 102 (4): 617–652.CrossrefGoogle Scholar

  • Chari, V., and P. Kehoe. 1999. “Optimal Fiscal and Monetary Policy.” In Handbook of Macroeconomics, edited by J.B. Taylor and M. Woodford, Vol. 1, 1671–1745. Elsevier.Google Scholar

  • Chari, V., P. Kehoe, and E. McGrattan. 2002. “Accounting for the Great Depression.” American Economic Review 92 (2): 22–27.CrossrefGoogle Scholar

  • Chari, V., P. Kehoe, and E. McGrattan. 2007. “Business Cycle Accounting.” Econometrica 75 (3): 781–836.CrossrefWeb of ScienceGoogle Scholar

  • Conesa, J., S. Kitao, and D. Krueger. 2009. “Taxing Capital? not a Bad Idea After All!” American Economic Review 99 (1): 25–48.CrossrefWeb of ScienceGoogle Scholar

  • Cooley, T., and G. Hansen. 1992. “Tax Distortions in a Neoclassical Monetary Economy.” Journal of Economic Theory 58 (2): 290–316.CrossrefGoogle Scholar

  • Correia, I. 1996. “Should Capital Income be Taxed in the Steady State?” Journal of Public Economics 60 (1): 147–151.CrossrefGoogle Scholar

  • Daveri, F., and M. Maffezzoli. 2001. “A Numerical Approach to Fiscal Policy, Unemployment, and Growth in Europe.” Econometrics and Applied Economics Working Paper, Istituto di Economia Politica, Bocconi University, No. 4.Google Scholar

  • Domeij, D. 2005. “Optimal Capital Taxation and Labour Market Search.” Review of Economic Dynamics 8 (3): 623–650.CrossrefGoogle Scholar

  • Finn, M. 1998. “Cyclical Effects of Government’s Employment and Goods Purchases.” International Economic Review 39 (3): 635–657.CrossrefGoogle Scholar

  • Gali, J., J. López-Salido, and J. Vallés. 2007. “Understanding the Effects of Government Spending on Consumption.” Journal of the European Economic Association 5 (1): 227–270.CrossrefGoogle Scholar

  • Guo, J., and K. Lansing. 1999. “Optimal Taxation of Capital Income with Impefectly Competitive Product Markets.” Journal of Economic Dynamics and Control 23 (7): 967–995.CrossrefGoogle Scholar

  • Judd, K. 1985. “Redistributive Taxation in a Simple Perfect Foresight Model.” Journal of Public Economics 28 (1): 59–83.CrossrefGoogle Scholar

  • Judd, K. 1997. “The Optimal Tax on Capital Income is Negative.” NBER Working Paper, No. 6004.Google Scholar

  • Judd, K. 1999. “Optimal Taxation and Spending in General Competitive Growth Models.” Journal of Public Economics 71 (1): 1–26.CrossrefGoogle Scholar

  • Judd, K. 2002. “Capital Income Taxation with Imperfect Competition.” American Economic Review 92 (2): 417–421.CrossrefGoogle Scholar

  • Klein, P. 2000. “Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model.” Journal of Economic Dynamics and Control 24 (10): 1405–1423.CrossrefGoogle Scholar

  • Kormendi, R. 1983. “Government Debt, Government Spending, and Private Sector Behavior.” American Economics Review 73 (5): 994–1010.Google Scholar

  • Koskela, E., and L. von Thadden. 2008. “Optimal Factor Taxation Under Wage Bargaining: a Dynamic Perspective.” German Economic Review 9 (2): 135–159.CrossrefWeb of ScienceGoogle Scholar

  • Krusell, P. 2002. “Time-Consistent Redistribution.” European Economic Review 46 (4–5): 755–769.CrossrefGoogle Scholar

  • Lansing, K. 1999. “Optimal Redistributive Capital Taxation in a Neoclassical Growth Model.” Journal of Public Economics 73 (3): 423–453.CrossrefGoogle Scholar

  • Ljungqvist, L., and T. Sargent. 2006. “Do Taxes Explain European Employment? Indivisible Labor, Human capital, Lotteries, and Savings.” NBER Macroeconomics Annual 21: 181–246.CrossrefGoogle Scholar

  • Lucas, R. 1990. “Supply-Side Economics: An Analytical Review.” Oxford Economic Papers 42 (2): 293–316.CrossrefGoogle Scholar

  • Malley, J., A. Philippopoulos, and U. Woitek. 2009. “To React or not? Technology Shocks, Fiscal Policy and Welfare in the EU-3.” European Economic Review 53 (6): 689–714.Web of ScienceCrossrefGoogle Scholar

  • Mortensen, D., and C. Pissarides. 1994. “Job Creation and Job Destruction in the Theory of Unemployment.” Review of Economic Studies 61 (3): 397–415.CrossrefGoogle Scholar

  • Munnell, A. 1990. “Why has Productivity Growth Declined? Productivity and Public Investment.” Federal Reserve Bank of Boston, New England Economic Review, January/February, 3–22.Google Scholar

  • Ohanian, L. 1997. “The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War.” American Economic Review 871: 23–40.Google Scholar

  • Pissarides, C. 1998. “The Impact of Employment Tax Cuts on Unemployment and Wages; The Role of Unemployment Benefits and Tax Structure.” European Economic Review 42 (1): 155–183.CrossrefGoogle Scholar

  • Prescott, E. 2002. “Prosperity and Depression.” American Economic Review 92 (2): 1–15.CrossrefWeb of ScienceGoogle Scholar

  • Prescott, E. 2004. “Why do Americans Work so Much More Than Europeans?” Quarterly Review, Federal Reserve Bank of Minneapolis, issue July, 2–13.Google Scholar

  • Shimer, R. 2009. “Convergence in Macroeconomics: The Labor Wedge.” American Economic Journal: Macroeconomics 1 (1): 280–297.Web of ScienceGoogle Scholar

  • Werning, I. 2007. “Optimal Fiscal Policy with Redistribution.” The Quarterly Journal of Economics 122 (3): 925–967.CrossrefGoogle Scholar

About the article

Published Online: 2018-10-12


Citation Information: The B.E. Journal of Macroeconomics, 20170226, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0226.

Export Citation

©2018 Walter de Gruyter GmbH, Berlin/Boston.Get Permission

Comments (0)

Please log in or register to comment.
Log in