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Second-Best Optimal Taxation of Oil and Capital in a Small Open Economy

  • Alberto Petrucci

    (LUISS University)

This paper analyzes the efficient taxation of oil and capital income in an oil-dependent infinite-lived economy facing perfect capital mobility. Two cases are examined: one with product market imperfections and free tax choice, one with perfect competition and tax restrictions. The optimal tax rates on oil and capital strictly depend on the international tax system implemented; however, they are also affected by the degree of market power and the extent to which monopoly profits are taxed, the type of tax restrictions and the use of oil (as an input or a consumer good). Under the residence-based system, capital income should always be exempted from taxation, while the optimal tax on productive oil may differ from zero. Under the source-based system, second-best taxes on capital and oil are non-zero.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.20.

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Date of creation: Feb 2010
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Handle: RePEc:fem:femwpa:2010.20
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  1. Julio I. Rotemberg & Michael Woodford, 1994. "Energy Taxes and Aggregate Economic Activity," NBER Chapters, in: Tax Policy and the Economy, Volume 8, pages 159-195 National Bureau of Economic Research, Inc.
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  7. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
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  9. Newbery, D., 2005. "Why Tax Energy? Towards a More Rational Energy Policy," Cambridge Working Papers in Economics 0508, Faculty of Economics, University of Cambridge.
  10. Svensson, Lars E O, 1984. "Oil Prices, Welfare, and the Trade Balance," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 649-72, November.
  11. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545 Elsevier.
  12. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  14. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
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