Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation
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  (of firm-specific profit taxation) and Diamond and Mirrlees  and Guesnerie  (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.
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- Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, October.
- Reinhorn, Leslie J., 2013.
"Production efficiency and excess supply,"
Mathematical Social Sciences,
Elsevier, vol. 65(2), pages 92-100.
- J. A. Mirrlees, 1972. "On Producer Taxation," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 105-111.
- Cornet, B., 1984. "Existence of equilibria in economies with increasing returns," CORE Discussion Papers 1984007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Knud Jørgen Munk, 1980. "Optimal Taxation with some Non-Taxable Commodities," Review of Economic Studies, Oxford University Press, vol. 47(4), pages 755-765.
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