Capital income taxation when markets are incomplete
AbstractIn this paper we investigate the welfare effects of capital income taxation in a standard one commodity general equilibrium model with incomplete markets (GEI) and production. We consider a competitive economy of two periods with uncertainty over a finite number S of possible states of nature revealed in the second period. One perishable commodity is traded on (S + 1) spot markets, there are 1 1 of consumer types. Securities are equity contracts; claims on second period's returns from production plans which are selected by J firms in the interest of shareholders. The number of such contracts is insufficient to span all possible contingencies; that is we assume that the security markets are incomplete. The central planner is (uniquely) endowed with a system of ad-valorem taxes on corporate dividends. If H is not too large, there exist tax reforms that have positive welfare effects; yet, tax reforms with opposite effects do also exist. This result has implications for the theory of optimal taxation and social discounting.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000011.
Date of creation: 01 Feb 2000
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Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
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