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Federal Reserve Bank of San Francisco
Working Papers in Applied Economic Theory
Optimal taxation of capital income with imperfectly competitive product markets
Jang-Ting Guo
Kevin J. Lansing
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%.


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Jang-Ting Guo & Kevin J. Lansing, Optimal taxation of capital income with imperfectly competitive product markets, Federal Reserve Bank of San Francisco, Working Papers in Applied Economic Theory 98-04, 1998.
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Keywords: Taxation ; Capital ; Income tax
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