117 Optimal Taxation with Private Insurance
- Yongsung Chang, Yena Park
- 117 Yongsung Chang 1.pdf
Abstract
We derive a fully nonlinear optimal income tax schedule in the presence of private insurance. As in the standard taxation literature without private insurance (e.g., Saez (2001)), the optimal tax formula can still be expressed in terms of sufficient statistics. With private insurance, however, the formula involves additional terms that reflect how the private market interacts with public insurance. For example, in our benchmark model-Huggett (1993)-the optimal tax formula should also consider pecuniary externalities as well as changes in the asset holdings of households. According to our analysis, the difference in optimal tax rates (with and without a private insurance market) can be as large as 11 percentage points.
Keywords: Optimal Taxation, Private Insurance, Pecuniary Externalities, Varia- tional Approach
JEL classification: E62, H21, D52