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Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market

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Author Info
Ho , Wai-Hong
Wang, Yong

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Abstract

This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17040.

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Date of creation: 01 Sep 2009
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Handle: RePEc:pra:mprapa:17040

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Related research
Keywords: Capital income taxation; Asymmetric information; Economic growth;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  12. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November. [Downloadable!] (restricted)
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  13. Caballe, Jordi, 1998. "Growth Effects of Taxation under Altruism and Low Elasticity of Intertemporal Substitution," Economic Journal, Royal Economic Society, vol. 108(446), pages 92-104, January. [Downloadable!] (restricted)
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  16. Garcia Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Second-best optimal taxation of capital and labor in a developing economy," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1045-1074, June. [Downloadable!] (restricted)
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  17. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October. [Downloadable!] (restricted)
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