Optimal taxation of capital income with imperfectly competitive product markets
Abstract: We show that the steady-state optimal tax on capital income can be negative, positive, or zero in a neoclassical growth model that allows for imperfectly competitive product markets. The sign of the optimal tax rate depends crucially on (1) the degree of monopoly power, (2) the extent to which monopoly profits can be taxed, (3) the size of the depreciation allowance, and (4) the magnitude of government expenditures. For an empirically plausible set of parameters, we find that the steady-state optimal capital tax can range between -10 and 22%.
Status: Published in Journal of Economic Dynamics & Control, v. 23, no. 7, June 1999
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Papers in Applied Economic Theory
Publication Date: 1998