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Income taxation and production efficiency in a simple two-sector economy

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  • Thomas Gaube

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    Abstract

    In a recent contribution, H. Naito (1999) has shown that production efficiency may be violated in the optimum with non-linear income taxation. Using a slightly simpler framework, this paper complements Naito's analysis in showing that production efficiency does not hold in the optimum with (i) non-linear and (ii) linear income taxation provided that second best and first best do not coincide. These findings indicate that income taxation generally implies the desirability to complement the distortion between consumer and producer prices by means of a corresponding distortion in input prices.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse14_2000.pdf
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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse14_2000.

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    Length: 18
    Date of creation: Oct 2000
    Date of revision:
    Handle: RePEc:bon:bonedp:bgse14_2000

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

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    Keywords: income taxation; production efficiency;

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    1. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
    2. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695.
    3. Michael Keen & David E. Wildasin, 2001. "Pareto Efficiency in International Taxation," Public Economics 0112003, EconWPA.
    4. Dreze, Jean & Stern, Nicholas, 1990. "Policy reform, shadow prices, and market prices," Journal of Public Economics, Elsevier, vol. 42(1), pages 1-45, June.
    5. Eggert, Wolfgang & Haufler, Andreas, 1999. "Capital taxation and production efficiency in an open economy," Economics Letters, Elsevier, vol. 62(1), pages 85-90, January.
    6. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
    7. Munk, Knud Jorgen, 1980. "Optimal Taxation with Some Non-Taxable Commodities," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 755-65, July.
    8. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
    10. Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March.
    11. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
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