Taxing capital income can improve welfare by enhancing private insurance markets.
The article explores how taxes can improve welfare in a dynamic economy with private insurance markets. When trades are visible to all, government intervention only displaces private insurance. But when trades are hidden, the market interest rate doesn't match the capital's productivity, leading to inefficient equilibria. Taxing capital income can bridge this gap, making private insurance more effective. Numerical examples show that optimal taxes can boost welfare compared to limited tax options or visible trades.