This paper studies optimal taxation in dynamic economies with increasing returns. We show that if there exists a stable open-loop Stackelberg equilibrium, the optimal rate of tax on capital income in the steady state is negative in order to eliminate the wedge between the private and the social rate of return to capital. This result also holds when the government expenditure has a positive effect on production activities of the private agents. In contrast, if the government takes a feedback strategy and if the government budget is balanced in every period, then the optimal capital income taxation rule obtained under the open-loop strategy may be violated. It is, however, shown that if the government can borrow from the public, the negative capital income tax rule may be established even under the feedback policy rule.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
17324.
Find related papers by JEL classification: H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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Benhabib, J. & Rustichini, A., 1996.
"Optimal Taxes Without Commitment,"
Working Papers
96-18, C.V. Starr Center for Applied Economics, New York University.
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Other versions:
Chari, V.V. & Kehoe, Patrick J., 1999.
"Optimal fiscal and monetary policy,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745
Elsevier.
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