We investigate the welfare effects of proportional income taxation\ud
in a standard general equilibrium model with incomplete markets (GEI).\ud
Formally, our analysis is on the allocative effects of state-contingent income\ud
tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully\ud
announced before markets open, and they are required to result in\ud
an ex-post constrained efficient allocation. Our main result is to show that\ud
there do typically exist contingent tax reforms that are Pareto improving.\ud
These reforms, acting directly on the asset span, modify private risk-sharing\ud
opportunities. Thus, unlike most of the GEI literature, the type of policy\ud
transmission mechanism considered does not rely on second-order, relative\ud
spot price effects.Yet, the key welfare effects of our tax reforms are substantially\ud
equivalent to those induced through changes in relative spot prices, as,\ud
for example, in Geanakoplos and Polemarchakis (1986), Geanakoplos et al.\ud
(1990), or in Citanna et al. (2001)
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