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Privatization, public investment, and capital income taxation


  • Huizinga, Harry
  • Nielsen, Soren Bo


The authors investigate the optimal boundary between the public and private production sectors. They use a model in which government and private production coexist -in which a range of production activities can be carried out by either the government or the private sector. In effect, the government determines which activities to maintain within the public sector and which to privatize. In choosing the sectoral boundary, the government trades off the relative inefficiency of marginal government production against the private investment distortion created by tax policy. In an open economy, the private investment decision, is distorted by a source-based income tax. In a closed economy, the private investment decision is distorted by either a private investment tax or a savings tax. Either tax produces a wedge between the gross return on investment and the net-of-tax return received by savers. Because of this tax wedge, the private cost of capital exceeds the shadow cost of public capital. Optimally, the government sector is shown to be"too large"in the sense that the government carries out some activities in which it has an efficiency disadvantage and the private sector has an efficiency advantage. And it invests more in those activities than the private sector would. Generally the size of the government sector is related positively to the investment tax wedge. The level of investment taxes -and thus the size of the state production sector- may be affected by tax competition in the international economy. As international capital becomes more mobile, there seems to be more scope for international (investment) tax competition. As a result of tax competition, perhaps, corporate income tax rates have been on a downward trend in European countries. In Europe, the general lowering of corporate income taxes has coincided with a trend toward privatizing government activities. The authors focus on the relationship between capital income taxes and the size of the gover
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Suggested Citation

  • Huizinga, Harry & Nielsen, Soren Bo, 2001. "Privatization, public investment, and capital income taxation," Journal of Public Economics, Elsevier, vol. 82(3), pages 399-414, December.
  • Handle: RePEc:eee:pubeco:v:82:y:2001:i:3:p:399-414

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    References listed on IDEAS

    1. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, vol. 38(152), pages 395-412, November.
    2. Boardman, Anthony E & Vining, Aidan R, 1989. "Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 1-33, April.
    3. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February.
    4. Bhaskar, V & Khan, Mushtaq, 1995. "Privatization and Employment: A Study of the Jute Industry in Bangladesh," American Economic Review, American Economic Association, vol. 85(1), pages 267-273, March.
    5. Hagen, Kare P., 1988. "Optimal shadow prices for public production," Journal of Public Economics, Elsevier, vol. 35(1), pages 119-127, February.
    6. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Partha Dasgupta & Joseph Stiglitz, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 87-103.
    8. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," European Economic Review, Elsevier, vol. 40(3-5), pages 569-579, April.
    9. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
    10. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    11. Abe, Kenzo, 1992. "Tariff Reform in a Small Open Economy with Public Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-222, February.
    12. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    13. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    14. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    15. repec:hrv:faseco:30727607 is not listed on IDEAS
    16. repec:hrv:faseco:30727606 is not listed on IDEAS
    17. Laban, Raul & Wolf, Holger C, 1993. "Large-Scale Privatization in Transition Economies," American Economic Review, American Economic Association, vol. 83(5), pages 1199-1210, December.
    18. Bos, Dieter & Peters, Wolfgang, 1988. "Privatization, internal control, and internal regulation," Journal of Public Economics, Elsevier, vol. 36(2), pages 231-258, July.
    19. Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper.
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    Cited by:

    1. Li, Shiyu & Lin, Shuanglin, 2011. "Is there any gain from social security privatization?," China Economic Review, Elsevier, vol. 22(3), pages 278-289, September.
    2. Li, Shiyu & Lin, Shuanglin, 2016. "Population aging and China's social security reforms," Journal of Policy Modeling, Elsevier, vol. 38(1), pages 65-95.
    3. Clemens Fuest & Li Liu, 2015. "Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China," CESifo Working Paper Series 5316, CESifo Group Munich.
    4. Dore, Mohammed H. I. & Kushner, Joseph & Zumer, Klemen, 2004. "Privatization of water in the UK and France--What can we learn?," Utilities Policy, Elsevier, vol. 12(1), pages 41-50, March.
    5. Gordon, Roger H, 2001. "Taxes and Privatization," CEPR Discussion Papers 2977, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation


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