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Entrepreneurial Labor And Capital Taxation

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  • Reis, Catarina

Abstract

This paper considers a Ramsey model of linear taxation for an economy with capital and two kinds of labor. If the government cannot distinguish between the return from capital and the return from entrepreneurial labor, then there will be positive capital income taxation, even in the long run. This happens because the only way to tax entrepreneurial labor is by also taxing capital. Furthermore, under fairly general conditions, the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive. Thus, even though both income taxes are positive, imposing uniform income taxation would lead to additional distortions in the economy.

Suggested Citation

  • Reis, Catarina, 2011. "Entrepreneurial Labor And Capital Taxation," Macroeconomic Dynamics, Cambridge University Press, vol. 15(03), pages 326-335, June.
  • Handle: RePEc:cup:macdyn:v:15:y:2011:i:03:p:326-335_00
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    Cited by:

    1. repec:eee:pubeco:v:154:y:2017:i:c:p:137-159 is not listed on IDEAS
    2. Ben-Gad, M., 2015. "The Optimal Taxation of Asset Income when Government Consumption is Endogenous: Theory, Estimation and Welfare," Working Papers 15/10, Department of Economics, City University London.
    3. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2011. "Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change," MPRA Paper 34111, University Library of Munich, Germany.
    4. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.
    5. Bishnu, Monisankar & Ghate, Chetan & Gopalakrishnan, Pawan, 2016. "Factor income taxation, growth, and investment specific technological change," Economic Modelling, Elsevier, vol. 57(C), pages 133-152.
    6. repec:bla:ecinqu:v:55:y:2017:i:4:p:1689-1711 is not listed on IDEAS
    7. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.

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