Monopoly Power and Optimal Taxation of Capital Income

Sheikh Tareq Selim
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Sheikh Tareq Selim: Cardiff University

Macroeconomics from EconWPA

Abstract: The recent general trend of cutting top marginal income tax rates in industrialized economies and the policy concern of enhancing competition in the US and the EU product markets subtly motivate the question if low income tax rates are optimal in an economy with imperfectly competitive markets. This paper examines long run optimal income tax policy in a model with private market monopoly distortion. It finds that the welfare-maximizing income tax policy is distortion-neutralizing, and the optimal policy may involve capital income tax or subsidy depending on the relative strength of two opposing effects --- the monopoly distortion effect, and the welfare effect of investment. If monopoly power is low (high), the welfare effect of investment (the monopoly distortion effect) dominates which supports a capital income tax (subsidy).

Keywords: Monopoly Power; Optimal Taxation; Ramsey Policy (search for similar items in EconPapers)
JEL-codes: D42 H21 H30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-pbe
Date: Written
Note: Type of Document - pdf; pages: 37. Cardiff Economics Working Paper Series

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0511001

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