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Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation

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  • Sushama Murty

    (Department of Economics, University of Exeter)

Abstract

In economies with Ramsey taxation, decreasing returns to scale, and private ownership, we show that second-best production efficiency is desirable when profit tax rates vary across groups of firms provided that the institutional rules which define profit incomes of consumers depend on the distribution of profits across these groups of firms. The classic results of Dasgupta and Stiglitz [1972] (of firm-specific profit taxation) and Diamond and Mirrlees [1971] and Guesnerie [1995] (of uniform one-hundred percent profit taxation) follow as special cases of our model. Moreover, second-best analysis suggests the desirability of proportionate taxation of inter-firm transactions in the absence of profit taxes. Alternatively, it recommends profit taxation as a perfect substitute for intermediate-input taxation. The analysis also suggests that, combined with the knowledge of the distribution of profit incomes in the economy, profit taxation can promote both efficiency and redistributive objectives of the government.

Suggested Citation

  • Sushama Murty, 2010. "Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation," Discussion Papers 1010, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1010
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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1010.pdf
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    References listed on IDEAS

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    1. Cornet, B., 1984. "Existence of equilibria in economies with increasing returns," LIDAM Discussion Papers CORE 1984007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Reinhorn, Leslie J., 2013. "Production efficiency and excess supply," Mathematical Social Sciences, Elsevier, vol. 65(2), pages 92-100.
    3. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695.
    4. 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.
    5. J. A. Mirrlees, 1972. "On Producer Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(1), pages 105-111.
    6. Knud Jørgen Munk, 1980. "Optimal Taxation with some Non-Taxable Commodities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(4), pages 755-765.
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    Cited by:

    1. Reinhorn, Leslie J., 2013. "Production efficiency and excess supply," Mathematical Social Sciences, Elsevier, vol. 65(2), pages 92-100.

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    More about this item

    Keywords

    Ramsey taxation; private ownership; profit taxation; production inefficiency; general equilibrium;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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