Working Paper

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%.

Keywords: Capital; Income tax; Taxation;

Status: Published in Journal of Economic Dynamics & Control, v. 23, no. 7, June 1999


Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1998

Number: 98-04