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Dynamic Optimal Taxation in Open Economies

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Abstract

This paper analyzes optimal capital taxation in open economies with strategic interaction in a neo-classical growth model. With a territorial or source-based tax system, I show that optimal capital taxes in steady state are zero for a large open economy, thereby generalizing the result previously established only for the special cases of a closed and a small open economy. If the steady-state assumption is relaxed, optimal capital taxes are still zero when marginal utilities of private and public consumption are bounded, or when the utility function is quasi- linear in consumption. Moreover, in the latter case the solution is also time-consistent. For the residential or world-wide tax principle, however, countries are not able to tax all factors of production, so capital income taxes are generally non-zero except in the limiting cases of a closed or small open economy. Allowing for both residential and territorial taxes restores zero capital taxes.

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  • Till Gross, 2013. "Dynamic Optimal Taxation in Open Economies," Carleton Economic Papers 13-06, Carleton University, Department of Economics.
  • Handle: RePEc:car:carecp:13-06
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    References listed on IDEAS

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    Cited by:

    1. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
    2. Soojin Kim, 2014. "The Effects of Labor Migration on Optimal Taxation: An International Tax Competition Analysis," 2014 Meeting Papers 508, Society for Economic Dynamics.

    More about this item

    Keywords

    Dynamic Optimal Taxation; Open Economy; Ramsey Taxation; Capital Taxes;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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