TY  - JOUR
AU  - Panageas,Stavros
TI  - Optimal taxation in the presence of bailouts
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15405
PY  - 2009
Y2  - October 2009
UR  - http://www.nber.org/papers/w15405
L1  - http://www.nber.org/papers/w15405.pdf
N1  - Author contact info:
Stavros Panageas
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL, 60637
Tel: (773) 834 4711
E-Mail: stavros.panageas@chicagobooth.edu
AB  - The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.
ER  -