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Optimal asymmetric taxation in a two-sector model with population ageing

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  • Igor Fedotenkov

    (Bank of Lithuania)

Abstract

This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.

Suggested Citation

  • Igor Fedotenkov, 2014. "Optimal asymmetric taxation in a two-sector model with population ageing," Bank of Lithuania Working Paper Series 15, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:15
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    More about this item

    Keywords

    Two sectors; factor mobility; asymmetric taxation; optimality;
    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
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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