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Optimal Taxation with Imperfect Competition and Aggregate Returns to Specialization

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  • Javier Coto-Martínez
  • Carlos Garriga
  • Fernando Sánchez-Losada

Abstract

In this article we explore the proposition that, in economies with imperfect competitive markets, the optimal capital income tax is negative and the optimal tax on firms' profits is confiscatory. We show that if the total factor productivity as well as the number of firms or varieties are endogenous instead of fixed, then the optimal fiscal policy can lead to different results. The government faces a trade-off between the fixed costs that society pays for the introduction of a new firm and the productivity gains associated to the introduction of a new variety. We find that the optimal fiscal policy depends on the relationship between the index of market power, the returns to specialization, and the government's ability to control entry. (JEL: H21, H30, E62) (c) 2007 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 6 (December)
Pages: 1269-1299

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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:6:p:1269-1299

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  1. Benassy, Jean-Pascal, 1998. "Is there always too little research in endogenous growth with expanding product variety?," European Economic Review, Elsevier, vol. 42(1), pages 61-69, January.
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  17. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, vol. 92(2), pages 417-421, May.
  18. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
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Cited by:
  1. Xavier Raurich & Fernando Sanchez-Losada & Montserrat Vilalta-Bufi, 2011. "Labor Mobility and Productivity Growth," Working Papers in Economics 254, Universitat de Barcelona. Espai de Recerca en Economia.
  2. Bucci, Alberto, 2013. "Returns to specialization, competition, population, and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2023-2040.
  3. Rodrigo A. Cerda & Diego Saravia, 2009. "Optimal Taxation With Heterogeneous Firms," Working Papers Central Bank of Chile 518, Central Bank of Chile.
  4. Daniel Cardona & Fernando Sanchez Losada, 2007. "Cost-Based Models of Economic Growth," Working Papers in Economics 179, Universitat de Barcelona. Espai de Recerca en Economia.
  5. Rodrigo Cerda & Diego Saravia, 2007. "Optimal Capital Income Taxation with Heterogeneous Firms," Documentos de Trabajo 316, Instituto de Economia. Pontificia Universidad Católica de Chile..

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