Optimal taxation with imperfect competition and increasing returns to specialization

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Optimal taxation with imperfect competition and increasing returns to specialization

Author Info

Javier Coto-Martinez () (Department of Economics, City University, London)
Carlos Gariga
Fernando Sanchez-Losada

Abstract

In this paper 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 measure 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 the society pays for the introduction of a new firm and the productivity gains associated to the introduction of a new variety. We show that both the optimal capital income tax and the optimal profits tax depend on the relationship between the index of market power, the returns to specialization and the government ability to control entry.

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Paper provided by Department of Economics, City University, London in its series City University Economics Discussion Papers with number 04/10.

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Length: 20 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:cty:dpaper:0410

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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