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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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse14_2000.
Length: 18 Date of creation: Oct 2000 Date of revision: Handle: RePEc:bon:bonedp:bgse14_2000
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