Taxing capital in an imperfectly competitive economy

Selim, Sheikh ORCID: https://orcid.org/0000-0002-7931-092X 2006. Taxing capital in an imperfectly competitive economy. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University. Available at: http://business.cardiff.ac.uk/sites/default/files/...

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Abstract

Evidence of declining trend in OECD economies’ income tax rates and the 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 imperfectly competitive economy. This paper examines optimal income tax policy in a dynamic neoclassical model with monopoly distortions. A capital subsidy, motivated by low private returns to capital, provides strong incentive to invest, but the adverse welfare effect of investment is not perceived by capital owners. Since profit seeking investment worsens second best welfare, and this effect is only perceived by the government, there is a strong motivation to tax capital. The paper presents a numerical characterization of the Ramsey policy and shows that switching to a Ramsey policy involving a capital tax is welfare improving.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Schools > Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce H Social Sciences > HG Finance
Uncontrolled Keywords:	Optimal taxation, Monopoly power, Ramsey policy
Publisher:	Cardiff University
ISBN:	1749-6101
Date of First Compliant Deposit:	30 March 2016
Last Modified:	21 Oct 2022 10:20
URI:	https://orca.cardiff.ac.uk/id/eprint/39875

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