Privatization, public investment, and capital income taxation
The authors investigate the optimal boundary between the public and private production sectors. They use a model in which government and private production coexist -in which a range of production activities can be carried out by either the government or the private sector. In effect, the government determines which activities to maintain within the public sector and which to privatize. In choosing the sectoral boundary, the government trades off the relative inefficiency of marginal government production against the private investment distortion created by tax policy. In an open economy, the private investment decision, is distorted by a source-based income tax. In a closed economy, the private investment decision is distorted by either a private investment tax or a savings tax. Either tax produces a wedge between the gross return on investment and the net-of-tax return received by savers. Because of this tax wedge, the private cost of capital exceeds the shadow cost of public capital. Optimally, the government sector is shown to be"too large"in the sense that the government carries out some activities in which it has an efficiency disadvantage and the private sector has an efficiency advantage. And it invests more in those activities than the private sector would. Generally the size of the government sector is related positively to the investment tax wedge. The level of investment taxes -and thus the size of the state production sector- may be affected by tax competition in the international economy. As international capital becomes more mobile, there seems to be more scope for international (investment) tax competition. As a result of tax competition, perhaps, corporate income tax rates have been on a downward trend in European countries. In Europe, the general lowering of corporate income taxes has coincided with a trend toward privatizing government activities. The authors focus on the relationship between capital income taxes and the size of the government production sector. Analogously, one could consider the relationship between labor income taxes and the size of the state sector. In that instance, the model predicts that a formerly state-owned enterprise, after privatization, reduces its payroll. Privatization also seems to lead to reduced employment levels. These results hold in both open economy and closed economy versions of the model.
|Date of creation:||31 Mar 1997|
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- Sandmo, Agnar & Dreze, Jacques H, 1971.
"Discount Rates for Public Investment in Closed and Open Economies,"
London School of Economics and Political Science, vol. 38(152), pages 395-412, November.
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- Harry Huizinga & Soeren Bo Nielsen, "undated". "Capital Income and Profits Taxation with Foreign Ownerwhip of Firms," EPRU Working Paper Series 95-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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- Bhaskar, V & Khan, Mushtaq, 1995. "Privatization and Employment: A Study of the Jute Industry in Bangladesh," American Economic Review, American Economic Association, vol. 85(1), pages 267-273, March.
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- Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
- Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
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- Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," European Economic Review, Elsevier, vol. 40(3-5), pages 569-579, April.
- Klaus M. Schmidt, 1995. "Incomplete Contracts and Privatization," Discussion Paper Serie A 480, University of Bonn, Germany.
- Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," Munich Reprints in Economics 19776, University of Munich, Department of Economics.
- Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
- Abe, Kenzo, 1992. "Tariff Reform in a Small Open Economy with Public Production," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 209-222, February.
- 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.
- repec:hrv:faseco:30727607 is not listed on IDEAS
- repec:hrv:faseco:30727606 is not listed on IDEAS
- Laban, Raul & Wolf, Holger C, 1993. "Large-Scale Privatization in Transition Economies," American Economic Review, American Economic Association, vol. 83(5), pages 1199-1210, December.
- Bos, Dieter & Peters, Wolfgang, 1988. "Privatization, internal control, and internal regulation," Journal of Public Economics, Elsevier, vol. 36(2), pages 231-258, July.
- Shapiro, C. & Willing, D.R., 1990. "Economic Rationales For The Scope Of Privatization," Papers 41, Princeton, Woodrow Wilson School - Discussion Paper. Full references (including those not matched with items on IDEAS)