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Second-best optimal taxation of capital and labor in a developing economy

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  • Garcia Penalosa, Cecilia
  • Turnovsky, Stephen J.

Abstract

This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 5-6 (June)
Pages: 1045-1074

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:5-6:p:1045-1074

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Web page: http://www.elsevier.com/locate/inca/505578

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Cited by:
  1. Warlters, Michael & Auriol, Emmanuelle, 2005. "The marginal cost of public funds in Africa," Policy Research Working Paper Series 3679, The World Bank.
  2. Aizenman, Joshua & Jinjarak, Yothin, 2006. "Globalization and Developing Countries - a Shrinking Tax Base ?," Santa Cruz Department of Economics, Working Paper Series qt8r12k4xr, Department of Economics, UC Santa Cruz.
  3. Turnovsky, Stephen J. & Basher, Md.A., 2009. "Fiscal policy and the structure of production in a two-sector developing economy," Journal of Development Economics, Elsevier, vol. 88(2), pages 205-216, March.
  4. Květa Kubátová, 2009. "Optimal Taxation – Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
  5. Ho, Wai-Hong & Wang, Yong, 2007. "Factor income taxation and growth under asymmetric information," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 775-789, April.
  6. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on saving in a growth model," wp.comunite 0071, Department of Communication, University of Teramo.
  7. Pierre-Richard Agénor & Kyriakos C. Neanidis, 2007. "Optimal Taxation and Growth with Public Goods and Costly Enforcement," Centre for Growth and Business Cycle Research Discussion Paper Series 89, Economics, The Univeristy of Manchester.
  8. Misch, Florian & Gemmell, Norman & Kneller, Richard, 2014. "Complementarity in Models of Public Finance and Endogenous Growth," Working Paper Series 3136, Victoria University of Wellington, Chair in Public Finance.
  9. Garcia-Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Production risk and the functional distribution of income in a developing economy: tradeoffs and policy responses," Journal of Development Economics, Elsevier, vol. 76(1), pages 175-208, February.
  10. Ho, Wai-Hong & Wang, Yong, 2009. "Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market," MPRA Paper 17040, University Library of Munich, Germany.
  11. Kazi Iqbal & Stephen Turnovsky, 2007. "Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation," Working Papers UWEC-2007-21-P, University of Washington, Department of Economics, revised Oct 2007.
  12. Monica Ospina Londoño & Fabiola Saavedra-Caballero, 2013. "Social Assistance and Informality: Examining the link in Colombia," DOCUMENTOS DE TRABAJO CIEF 010933, UNIVERSIDAD EAFIT.
  13. Gonzalez, Francisco M. & Neary, Hugh M., 2008. "Prosperity without conflict," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2170-2181, October.
  14. Marcin Piatkowski & Mariusz Jarmuzek, 2008. "Zero Corporate Income Tax in Moldova," IMF Working Papers 08/203, International Monetary Fund.

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