Monopoly Power and Optimal Taxation of Labor Income
AbstractThis paper studies the Ramsey problem of optimal labor income taxation in a simple model economy which deviates from a first best representative agent economy in three important aspects, namely, flat rate second best tax, monopoly power in intermediate product market, and monopolistic wage setting. There are three key findings: (1) In order to correct for monopoly distortion the Ramsey tax prescription is to set the labor income tax rate lower than its competitive market analogue; (2) Government’s optimal tax policy is independent of its fiscal treatment of distributed pure profits; and (3) For higher levels of monopoly distortions Ramsey policy is more desirable than the first best policy. The key analytical results are verified by a calibration which fits the model to the stylized facts of the US economy.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0511002.
Length: 33 pages
Date of creation: 01 Nov 2005
Date of revision:
Note: Type of Document - pdf; pages: 33. Cardiff Economics Working Paper Series
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Optimal taxation; Monopoly power; Ramsey policy;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-05 (All new papers)
- NEP-MIC-2005-11-05 (Microeconomics)
- NEP-PBE-2005-11-05 (Public Economics)
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