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Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation

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Author Info

  • Sushama Murty

    (Department of Economics, University of Exeter)

Abstract

In economies with Ramsey taxation, decreasing returns to scale, and private ownership, we show that second-best production efficiency is desirable when profit tax rates vary across groups of firms provided that the institutional rules which define profit incomes of consumers depend on the distribution of profits across these groups of firms. The classic results of Dasgupta and Stiglitz [1972] (of firm-specific profit taxation) and Diamond and Mirrlees [1971] and Guesnerie [1995] (of uniform one-hundred percent profit taxation) follow as special cases of our model. Moreover, second-best analysis suggests the desirability of proportionate taxation of inter-firm transactions in the absence of profit taxes. Alternatively, it recommends profit taxation as a perfect substitute for intermediate-input taxation. The analysis also suggests that, combined with the knowledge of the distribution of profit incomes in the economy, profit taxation can promote both efficiency and redistributive objectives of the government.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1010.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1010.

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Date of creation: 2010
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Handle: RePEc:exe:wpaper:1010

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Web page: http://business-school.exeter.ac.uk/about/departments/economics/
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Related research

Keywords: Ramsey taxation; private ownership; pro t taxation; production ineciency; general equilibrium.;

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References

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  1. Leslie J. Reinhorn, 2011. "Production efficiency and excess supply," Working Papers 2011_13, Durham University Business School.
  2. Cornet, B., 1984. "Existence of equilibria in economies with increasing returns," CORE Discussion Papers 1984007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Munk, Knud Jorgen, 1980. "Optimal Taxation with Some Non-Taxable Commodities," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 755-65, July.
  4. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695.
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Cited by:
  1. Reinhorn, Leslie J., 2013. "Production efficiency and excess supply," Mathematical Social Sciences, Elsevier, vol. 65(2), pages 92-100.

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