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Optimal taxation of capital income with imperfectly competitive product markets

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Author Info
Jang-Ting Guo
Kevin J. Lansing

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Abstract

We show that the steady-state optimal tax on capital income can be negative, positive, or zero in a neoclassical growth model that allows for imperfectly competitive product markets. The sign of the optimal tax rate depends crucially on (1) the degree of monopoly power, (2) the extent to which monopoly profits can be taxed, (3) the size of the depreciation allowance, and (4) the magnitude of government expenditures. For an empirically plausible set of parameters, we find that the steady-state optimal capital tax can range between -10 and 22%.

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Publisher Info
Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 98-04.

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Date of creation: 1998
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Publication status: Published in Journal of Economic Dynamics & Control, v. 23, no. 7, June 1999
Handle: RePEc:fip:fedfap:98-04

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Keywords: Taxation ; Capital ; Income tax;

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  1. Jang-Ting Guo, 2004. "Tax Policy Under Keeping Up with the Joneses and Imperfectly Competitive Product Markets," Econometric Society 2004 North American Winter Meetings 17, Econometric Society. [Downloadable!]
  2. Koskela, Erkki & von Thadden, Leopold, 2002. "Optimal factor taxation under wage bargaining: A dynamic perspective," Discussion Paper Series 1: Economic Studies 2002,31, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Hsiao-wen Hung, 2007. "First-best tax policy, congestion, and imperfect competition," International Review of Economics, Springer, vol. 54(1), pages 66-79, March. [Downloadable!] (restricted)
  4. Jonsson, Magnus, 2004. "The Welfare Cost of Imperfect Competition and Distortionary Taxation," Working Paper Series 170, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  5. Arantza Gorostiaga, 2003. "Optimal Fiscal Policy with Rationing in the Labor Market," DFAEII Working Papers 200229, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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  6. Michael J. Koop, 2001. "Capital Income Taxation of Asymmetric Countries," Kiel Working Papers 1041, Kiel Institute for the World Economy. [Downloadable!]
  7. Erkki Koskela & Leopold von Thadden, 2003. "Optimal Factor Taxation under Wage Bargaining -- A Dynamic Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Tatiana Damjanovic & Charles Nolan, 2005. " Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices," CDMA Working Paper Series 0509, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
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  9. Mino, Kazuo, 2000. "Optimal Taxation in Dynamic Economies with Increasing Returns," MPRA Paper 17324, University Library of Munich, Germany. [Downloadable!]
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  10. Jang-Ting Guo & Kevin Lansing, 1999. "Fiscal policy, increasing returns, and endogenous fluctuations," Working Papers in Applied Economic Theory 99-08, Federal Reserve Bank of San Francisco. [Downloadable!]
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  11. Arefiev, Nikolay & Baron, Tatyana, 2006. "Capital Taxation and Rent Seeking," MPRA Paper 9988, University Library of Munich, Germany. [Downloadable!]
  12. James B. Davies & Jie Zhang & Jinli Zeng, 2000. "Optimal tax mix in a two-sector growth model with transitional dynamics," Departmental Working Papers wp0105, National University of Singapore, Department of Economics. [Downloadable!]
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  13. George Economides & Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2003. "Electoral Uncertainty, Fiscal Policies and Growth: Theory and Evidence from Germany, the UK and the US," Working Papers 2003_16, Department of Economics, University of Glasgow. [Downloadable!]
  14. Baltasar Manzano & Jesús Ruiz, 2002. "Política Fiscal Óptima: el estado de la Cuestión," Documentos del Instituto Complutense de Análisis Económico 0212, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales. [Downloadable!]
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  15. George Economides & Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2003. "Electoral Uncertainty, Fiscal Policies & Growth: Theory and Evidence from Germany, the UK and the US," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  16. Magnus Jonsson, 2007. "The welfare cost of imperfect competition and distortionary taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 576-594, October. [Downloadable!] (restricted)
  17. George Economides & Apostolis Philippopoulos, 2008. "Growth enhancing policy is the means to sustain the environment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 207-219, January. [Downloadable!] (restricted)
  18. Sharon Harrison & Jang-Ting Guo, 2006. "Useful Government Spending and Macroeconomic (In)stability under Balanced-Budget Rules," Working Papers 0701, Barnard College, Department of Economics. [Downloadable!]
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  19. Arantza Gorostiaga, 2002. "Should Fiscal Policy Be Di.erent in a Non-Competitive Framework?," Economic Working Papers at Centro de Estudios Andaluces E2002/11, Centro de Estudios Andaluces. [Downloadable!]
    Other versions:
  20. Javier Coto-Martínez & Carlos Garriga & Fernando Sánchez-Losada, 2007. "Optimal taxation with imperfect competition and aggregate returns to specialization," Working Papers 2007-036, Federal Reserve Bank of St. Louis. [Downloadable!]
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  21. Javier Coto-Martinez & Carlos Gariga & Fernando Sanchez-Losada, 2004. "Optimal taxation with imperfect competition and increasing returns to specialization," City University Economics Discussion Papers 04/10, Department of Economics, City University, London. [Downloadable!]
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