Optimal taxation and redistribution in a two sector two class agents' economy

Selim, Sheikh Tareq 2011. Optimal taxation and redistribution in a two sector two class agents' economy. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University. Available at: http://business.cardiff.ac.uk/sites/default/files/...

Preview

PDF - Published Version Download (417kB) | Preview

Abstract

We examine the optimal taxation problem in a two sector neoclassical economy with workers and capitalists. We show that in a steady state of this economy the optimal policy may involve a capital income tax or subsidy, dfferential taxation of labour income and redistribution. The level and the direction of the redistribution associated with such an optimal policy depends on the pre tax allocation of capital but not on the social weights attached to the different groups of taxpayers. Excess production of consumption goods creates a difference between the social marginal values of consumption and investment which in turns violates the production efficiency condition. Such a difference can be undone by taxing capital income from the consumption sector, and with this optimal policy the government can implement a redistribution scheme where both workers and capitalists bear the burden of distorting taxes. On the contrary, an optimal policy that involves a capital income subsidy in the production of consumption can implement allocations that minimize the relative price difference between consumption and investment that resulted from the excess production of investment goods.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HJ Public Finance
Uncontrolled Keywords:	Optimal taxation; Ramsey problem; Two Sector Economy; Redistribution.
Publisher:	Cardiff University
ISBN:	1749-6101
Date of First Compliant Deposit:	30 March 2016
Last Modified:	19 Mar 2016 22:48
URI:	https://orca.cardiff.ac.uk/id/eprint/27966

Citation Data

Actions (repository staff only)

Edit Item