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Optimal Taxation in a Two Sector Economy with Heterogeneous Agents

Author

Listed:
  • Sheikh Selim

    (Cardiff University)

Abstract

In this paper we examine the optimal taxation problem in a two sector economy with heterogeneous agents. We show that in a steady state of this economy the optimal capital income tax rate can be different from zero. In this economy since capital and labour margins are interdependent, any difference in investment goods and consumption goods prices allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores the production efficiency condition.

Suggested Citation

  • Sheikh Selim, 2010. "Optimal Taxation in a Two Sector Economy with Heterogeneous Agents," Economics Bulletin, AccessEcon, vol. 30(1), pages 534-542.
    • Handle: RePEc:ebl:ecbull:eb-09-00554
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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I1-P49.pdf
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    Citations

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    Cited by:

    1. Igor Fedotenkov, 2014. "Optimal asymmetric taxation in a two-sector model with population ageing," Bank of Lithuania Working Paper Series 15, Bank of Lithuania.
    2. Igor Fedotenkov, 2019. "Optimal asymmetric sector-specific labour taxation in an overlapping generations model," Journal of Economics, Springer, vol. 127(1), pages 1-18, June.
    3. Kazunobu Muro, 2013. "Optimal labor income taxation in a two-sector dynamic general equilibrium model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 60(1), pages 21-48, March.

    More about this item

    Keywords

    Optimal Taxation; Ramsey Problem; Heterogeneous Agents;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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