In this research project I will conduct a quantitative analysis of the welfare gains and losses arising from changes in taxation regimes. A general equilibrium model with incomplete insurance markets will be developed, solved and simulated. The model will be calibrated to mimic key observations in the data of several specific European countries and predictions for the changes in the wealth distribution will be provided. Previous results in the literature suggest that: ( I ) poor agents suffer sizable reductions in welfare as a consequence of a change to theoretically optimal taxation schemes. and (2), that a zero capital income tax is not optimal if insurance markets are incomplete. This results. however, were obtained in a model with heterogeneous agents and complete markets (result 1), and in a model with incomplete markets and inelastic labour supply (result 2), therefore, they are tar from conclusive.
The project involves to solve for transitions of stochastic dynamic optimisation problems, and the ability of the unique numerical method (PEA) available for dealing with this problems. will be tested