Optimal taxation with imperfect competition and aggregate returns to specialization

Javier Coto-Martinez, Carlos Garriga () and Fernando Sánchez-Losada

No 2007-036, Working Papers from Federal Reserve Bank of St. Louis

Abstract: In this paper we explore the proposition that in economies with imperfect competitive markets the optimal capital income tax is negative and the optimal tax on firms profits is confiscatory. We show that if the total factor productivity as well as the measure of firms or varieties are endogenous instead of fixed, then the optimal fiscal policy can lead to different results. The government faces a trade-off between the fixed costs that society pays for the introduction of a new firm and the productivity gains associated to the introduction of a new variety. We find that the optimal fiscal policy depends on the relationship between the index of market power, the returns to specialization, and the government?s ability to control entry.

Keywords: Taxation; Fiscal policy (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (14)

Published in Journal of The European Economic Association (JEEA), December 2007, 5(6), pp. 1269-99

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Journal Article: Optimal Taxation with Imperfect Competition and Aggregate Returns to Specialization (2007)
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