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Monopoly Power and Optimal Taxation of Capital Income


  • Sheikh Tareq Selim

    (Cardiff University)


The recent general trend of cutting top marginal income tax rates in industrialized economies and the policy concern of enhancing competition in the US and the EU product markets subtly motivate the question if low income tax rates are optimal in an economy with imperfectly competitive markets. This paper examines long run optimal income tax policy in a model with private market monopoly distortion. It finds that the welfare-maximizing income tax policy is distortion-neutralizing, and the optimal policy may involve capital income tax or subsidy depending on the relative strength of two opposing effects --- the monopoly distortion effect, and the welfare effect of investment. If monopoly power is low (high), the welfare effect of investment (the monopoly distortion effect) dominates which supports a capital income tax (subsidy).

Suggested Citation

  • Sheikh Tareq Selim, 2005. "Monopoly Power and Optimal Taxation of Capital Income," Macroeconomics 0511001, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0511001 Note: Type of Document - pdf; pages: 37. Cardiff Economics Working Paper Series

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    References listed on IDEAS

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    More about this item


    Monopoly Power; Optimal Taxation; Ramsey Policy;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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