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Second-best optimal taxation of capital and labor in a developing economy

  • Garcia Penalosa, Cecilia
  • Turnovsky, Stephen J.

This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 5-6 (June)
Pages: 1045-1074

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:5-6:p:1045-1074
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