Taxing Capital in an Imperfectly Competitive Economy

Arbeitspapier

Evidence of declining trend in OECD economies' income tax rates and the concern of enhancing competition in the US and the EU product markets subtly motivate the question if low income tax rates are optimal in an imperfectly competitive economy. This paper examines optimal income tax policy in a dynamic neoclassical model with monopoly distortions. A capital subsidy, motivated by low private returns to capital, provides strong incentive to invest, but the adverse welfare effect of investment is not perceived by capital owners. Since profit seeking investment worsens second best welfare, and this effect is only perceived by the government, there is a strong motivation to tax capital. The paper presents a numerical characterization of the Ramsey policy and shows that switching to a Ramsey policy involving a capital tax is welfare improving.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Cardiff Economics Working Papers ; No. E2005/5

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: Monopoly ; Fiscal Policy ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Fiscal Policies and Behavior of Economic Agents: General
• Subject: Optimal taxation ; Monopoly power ; Ramsey policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Selim, Sheikh
• Event: Veröffentlichung
• (who): Cardiff University, Cardiff Business School
• (where): Cardiff
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/83967
• Last update: 10.03.2025, 11:43 AM CET