Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market

Wai-Hong Ho () and Yong Wang ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives.

Keywords: Capital income taxation; Asymmetric information; Economic growth (search for similar items in EconPapers)
JEL-codes: D82 H21 O41 (search for similar items in EconPapers)
Date: 2009-09-01
New Economics Papers: this item is included in nep-cta, nep-dge and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:17040

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