Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of such heterogeneity for the determination of optimal capital and income taxes in a model with matching frictions in the labor market. In line with a recent finding...

We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government...

Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of welfare heterogeneity between these two groups for the determination of optimal capital and labor income taxes in a model with matching frictions in the labor...

We study optimal capital taxation under limited commitment. We prove that the optimal tax rate on capital income should be positive in steady state and should be increasing over time provided that full risk-sharing is not feasible. In a limited commitment environment, a one unit increase of...

In this paper we argue that it might not be such a bad idea to tax capital income in the long run. We address this question in an environment in which individuals are finitely lived and face uninsurable idiosyncratic labor income risk. In choosing a tax system a benevolent planner trades off...

Where the state evolves according to a discrete-state Markov chain, we sustain Lucas and Stokey's debt structure dynamics by having it emerge sequentially as the unique outcome of a sequence of choices made by two sequences of independent government departments. Each period a tax authority sets...

Household-specific growth rates of the tax base imply that the timing of tax collections determines the distribution of tax burdens and wealth across households. Changes in fiscal policy do not only shift tax burdens across generations, but also within cohorts. Institutional deficit constraints...

We model the optimal reaction of a public PAYG pension system to demographic shocks. We compare the ex-ante first best and second best solution of a Ramsey planner with full commitment to the outcome under simple third best rules that mimic the pension systems observed in the real world. The...

We study optimal government spending in a business cycle model with labor income taxes and unemployment due to hiring costs. Labor market frictions raise the optimal steady state ratio of government spending to private consumption. The labor tax rate is higher since profits are taxed that arise...

This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main …ndings are: (i) it is optimal for a benevolent government, which cares equally about its...