Second-Best Optimal Taxation of Capital and Labor in a Developing Economy

Cecilia Garcia Penalosa () and Stephen J Turnovsky ()
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Cecilia Garcia Penalosa: CNRS, GREQAM and IDEP
Authors registered in the RePEc Author Service: Cecilia Garcia-Penalosa ()

No 307, IDEP Working Papers from Institut d'economie publique (IDEP), Marseille, France

Abstract: This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.

Keywords: endogenous growth; optimal taxation; informal sector; developing economies. (search for similar items in EconPapers)
JEL-codes: E62 O17 O23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-mac, nep-pub and nep-sea
Date: 2003-05
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Related works:
Working Paper: Second-Best Optimal Taxation of Capital and Labor in a Developing Economy (2004)
Journal Article: Second-best optimal taxation of capital and labor in a developing economy (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:iep:wpidep:0307

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