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Optimal Taxation in Dynamic Economies with Increasing Returns

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  • Mino, Kazuo

Abstract

This paper studies optimal taxation in dynamic economies with increasing returns. We show that if there exists a stable open-loop Stackelberg equilibrium, the optimal rate of tax on capital income in the steady state is negative in order to eliminate the wedge between the private and the social rate of return to capital. This result also holds when the government expenditure has a positive effect on production activities of the private agents. In contrast, if the government takes a feedback strategy and if the government budget is balanced in every period, then the optimal capital income taxation rule obtained under the open-loop strategy may be violated. It is, however, shown that if the government can borrow from the public, the negative capital income tax rule may be established even under the feedback policy rule.

Suggested Citation

  • Mino, Kazuo, 2000. "Optimal Taxation in Dynamic Economies with Increasing Returns," MPRA Paper 17324, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17324
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    References listed on IDEAS

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    1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
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    13. Zhang, Junxi, 2000. "Public services, increasing returns, and equilibrium dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 227-246, February.
    14. Mino, Kazuo, 2001. "On Time Consistency in Stackelberg Differential Games," MPRA Paper 17028, University Library of Munich, Germany.
    15. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
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    Cited by:

    1. Wei-Bin ZHANG, 2014. "Gender Discrimination, Education and Economic Growth in a Generalized Uzawa-Lucas Two-Sector Model," Timisoara Journal of Economics and Business, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 7(1), pages 1-34.
    2. Wei-Bin Zhang, 2016. "Impact of Education Subsidies and Taxation on Wealth and Human Capital Accumulation," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 2(3), pages 222-247.
    3. Mino, Kazuo, 2001. "On Time Consistency in Stackelberg Differential Games," MPRA Paper 17028, University Library of Munich, Germany.
    4. Mino, Kazuo, 2004. "Weitzman's rule with market distortions," Japan and the World Economy, Elsevier, vol. 16(3), pages 307-329, August.
    5. KONO Tatsuhito & KITAMURA Naoki & YAMASAKI Kiyoshi & IWAKAMI Kazuki, 2013. "Quantitative Analysis of Dynamic Inconsistencies in Disaster Prevention Infrastructure Improvement: An example of coastal levee improvement in the city of Rikuzentakata," Discussion papers 13072, Research Institute of Economy, Trade and Industry (RIETI).
    6. Wei-Bin Zhang, 2014. "Endogenous population with human and physical capital accumulation," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 231-252, September.
    7. Mino, Kazuo, 2004. "On the Generalized Weitzman's Rule," MPRA Paper 16996, University Library of Munich, Germany.
    8. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, vol. 63(2), pages 77-90, June.

    More about this item

    Keywords

    optimal tax; increasing returns; differential game; open- loop policy; feedback policy;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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