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Nonoptimality of the Friedman Rule with Capital Income Taxation

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  • ALBERTO PETRUCCI

Abstract

This paper studies the efficient taxation of money and factor income in intertemporal optimizing growth models with infinite horizons, transaction costs technologies and flexible prices.� Second-best optimality calls for a positive inflation tax and a non-zero capital income tax when there are restrictions on taxation of production factors or profits/rents.� Our cases of nonoptimality of the Friedman rule - which differs from those of Mulligan and Sala-i-Martin (1997) and extend substantially those of Schmitt-Grohe and Uribe (2004a) - follow from the violation of the Diamond and Mirrlees (1971) principle on production efficiency.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): 1 (02)
Pages: 163-183

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:1:p:163-183

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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