Revisiting the capital tax ambiguity result
Selim, Sheikh Tareq
- Publisher: Cardiff University
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.
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