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Optimal taxation in dynamic economies with increasing returns

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  • Mino, Kazuo

Abstract

This paper studies optimal taxation in dynamic economies with increasing returns. We show that if there exists a stable open-loop Stackelberg equilibrium, the optimal rate of tax on capital income in the steady state is negative in order to eliminate the wedge between the private and the social rate of return to capital. This result also holds when the government expenditure has a positive effect on production activities of the private agents. In contrast, if the government takes a feedback strategy and if the government budget is balanced in every period, then the optimal capital income taxation rule obtained under the open-loop strategy may be violated. It is, however, shown that if the government can borrow from the public, the negative capital income tax rule may be established even under the feedback policy rule.

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Bibliographic Info

Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 13 (2001)
Issue (Month): 3 (August)
Pages: 235-253

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Handle: RePEc:eee:japwor:v:13:y:2001:i:3:p:235-253

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Web page: http://www.elsevier.com/locate/inca/505557

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  1. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  2. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, vol. 60(1), pages 147-151, April.
  4. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  5. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
  6. Kemp, Murray C & Long, Ngo Van & Shimomura, Koji, 1993. "Cyclical and Noncyclical Redistributive Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 415-29, May.
  7. Xie, Danyang, 1997. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Journal of Economic Theory, Elsevier, vol. 76(2), pages 412-430, October.
  8. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
  9. ColemanII, Wilbur John, 2000. "Welfare and optimum dynamic taxation of consumption and income," Journal of Public Economics, Elsevier, vol. 76(1), pages 1-39, April.
  10. Jang-Ting Guo & Kevin J. Lansing, 1998. "Optimal taxation of capital income with imperfectly competitive product markets," Working Papers in Applied Economic Theory 98-04, Federal Reserve Bank of San Francisco.
  11. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  13. Pelloni, A. & Waldmann, R., 1997. "Can Waste Improve Welfare?," Economics Working Papers eco97/12, European University Institute.
  14. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  15. Lansing, Kevin J., 1999. "Optimal redistributive capital taxation in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 73(3), pages 423-453, September.
  16. Mino, Kazuo, 2001. "On Time Consistency in Stackelberg Differential Games," MPRA Paper 17028, University Library of Munich, Germany.
  17. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  18. Zhang, Junxi, 2000. "Public services, increasing returns, and equilibrium dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 227-246, February.
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Cited by:
  1. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, vol. 63(2), pages 77-90, June.
  2. Mino, Kazuo, 2004. "Weitzman's rule with market distortions," Japan and the World Economy, Elsevier, vol. 16(3), pages 307-329, August.
  3. Mino, Kazuo, 2004. "On the Generalized Weitzman's Rule," MPRA Paper 16996, University Library of Munich, Germany.
  4. Mino, Kazuo, 2001. "On Time Consistency in Stackelberg Differential Games," MPRA Paper 17028, University Library of Munich, Germany.

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