Optimal Taxation with Commitment in a Two-sector Neoclassical Economy
AbstractThis paper examines dynamic optimal income taxation problem in a two- sector neoclassical model where the government is able to commit to a sequence of tax plans for future. It finds that (1) while it is optimal to set a zero long run capital tax for the capital goods sector, steady state optimal capital tax can be nonzero in the consumption goods sector; (2) if the government faces an ex ante constraint of setting equal factor income taxes, the optimal levels of both capital tax rates are nonzero. The distortion created by the nonzero capital tax in consumption goods sector, given the other capital tax is set at zero, is in no way explosive in nature, since economic agents can avoid the compounding tax liabilities simply by shifting depreciated capital.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0502027.
Length: 38 pages
Date of creation: 21 Feb 2005
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Note: Type of Document - pdf; pages: 38
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Optimal Taxation; Primal Approach; Two-sector Model; Ramsey Problem.;
Find related papers by JEL classification:
- H - Public Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-DGE-2005-04-16 (Dynamic General Equilibrium)
- NEP-MAC-2005-04-16 (Macroeconomics)
- NEP-PBE-2005-04-16 (Public Economics)
- NEP-PUB-2005-04-16 (Public Finance)
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