Dynamic Optimal Taxation in Open Economies

Till Gross ()

No 13-06, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: This paper analyzes optimal capital taxation in open economies with strategic interaction in a neo-classical growth model. With a territorial or source-based tax system, I show that optimal capital taxes in steady state are zero for a large open economy, thereby generalizing the result previously established only for the special cases of a closed and a small open economy. If the steady-state assumption is relaxed, optimal capital taxes are still zero when marginal utilities of private and public consumption are bounded, or when the utility function is quasi- linear in consumption. Moreover, in the latter case the solution is also time-consistent. For the residential or world-wide tax principle, however, countries are not able to tax all factors of production, so capital income taxes are generally non-zero except in the limiting cases of a closed or small open economy. Allowing for both residential and territorial taxes restores zero capital taxes.

Keywords: Dynamic Optimal Taxation; Open Economy; Ramsey Taxation; Capital Taxes (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-08-06
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published: Carleton Economic Papers

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