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Optimal labor income taxation in a two-sector dynamic general equilibrium model

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  • Kazunobu Muro

Abstract

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive. Copyright Springer-Verlag Berlin Heidelberg 2013

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  • 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.
    • Handle: RePEc:spr:inrvec:v:60:y:2013:i:1:p:21-48
    DOI: 10.1007/s12232-012-0171-z
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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.

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    More about this item

    Keywords

    Optimal taxation problem; Primal approach to the Ramsey problem; Implementability condition; Two-sector Cobb-Douglas GDP function; Stolper–Samuelson theorem; E62; H21; O41;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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