Optimal taxation strategy could improve welfare by taxing capital negatively.
When some people face risks that can't be insured, deciding whether to tax labor and capital income is tricky. In a model with production, researchers found that the best taxes on labor and capital depend on the type of risks, how different people's incomes are, and how tax money is used. If shocks mostly affect labor income and people's incomes are similar, it's good to tax capital. But in other cases, taxing capital less can make things better.