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Capital Taxation and Rent Seeking

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  • Arefiev, Nikolay
  • Baron, Tatyana

Abstract

We find the optimal capital income tax rate in an imperfectly competitive economy, where some part of recourses is devoted to rent-seeking activity. Optimal tax offsets the difference between marginal social and marginal private return to capital, which is a result of rent seeking, and the difference between the before tax interest rate and the marginal productivity of capital, which arises from imperfect competition. Optimal capital income tax rate depends neither on other tax rates nor on overall tax burden. Numerically it is close to zero.

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File URL: http://mpra.ub.uni-muenchen.de/9988/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9988.

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Date of creation: 11 Dec 2006
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Handle: RePEc:pra:mprapa:9988

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Keywords: Capital taxation; rent seeking; imperfect competition;

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  1. Arefiev, Nikolay, 2008. "The Inconsistency Puzzle Resolved: an Omitted Variable," MPRA Paper 9300, University Library of Munich, Germany.
  2. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  3. Alan J. Auerbach & James R. Hines Jr., 2001. "Perfect Taxation with Imperfect Competition," NBER Working Papers 8138, National Bureau of Economic Research, Inc.
  4. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
  5. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
  6. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  7. Lansing, Kevin J., 1999. "Optimal redistributive capital taxation in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 73(3), pages 423-453, September.
  8. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, vol. 60(1), pages 147-151, April.
  9. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
  10. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  11. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  12. Benhabib, Jess & Rustichini, Aldo, 1997. "Optimal Taxes without Commitment," Journal of Economic Theory, Elsevier, vol. 77(2), pages 231-259, December.
  13. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  14. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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