Revisiting the capital tax ambiguity result

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Selim, Sheikh Tareq ; Cardiff University (2006)
  • Publisher: Cardiff University
  • Subject: HB | HF | HG

We provide a welfare based interpretation of the capital tax ambiguity result (due to Guo \ud & Lansing, 1999). We show that the sign ambiguity of optimal capital tax rate in an \ud imperfectly competitive economy is mainly due to the welfare cost of investment. The \ud substitution and income effects of profit seeking investment reinforce each other which \ud create a deadweight loss in welfare. Investors cannot perceive this effect and never invest \ud at the right level. This loss is perceived only by the government which motivates capital \ud taxation.
  • References (6)

    Guo, J-T. & K. J. Lansing, 1999. Optimal Taxation of Capital Income with Imperfectly Competitive Product Markets, Journal of Economic Dynamics and Control, 23, 967-995.

    Judd, K. L. 1997. The Optimal Tax on Capital Income is Negative, NBER Working Paper No. 6004.

    Judd, K. L. 1999. Optimal Taxation and Spending in General Competitive Growth Models, Journal of Public Economics, 71, 1-26.

    Judd, K. L. 2002. Capital Income Taxation with Imperfect Competition, The American Economic Review, 92, 417-421.

    Ljungqvist, L. & Sargent, T. J. (2000). Recursive Macroeconomic Theory. London: The MIT Press, 2000.

    Stiglitz, J. E. & P. Dasgupta, 1971. Differential Taxation, Public Goods, and Economic Efficiency, The Review of Economic Studies, 38, 151-174.

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