Optimal Taxation in a Two Sector Economy with Heterogeneous Agents

Sheikh Selim ()
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Sheikh Selim: Cardiff University

Economics Bulletin, 2010, vol. 30, issue 1, 534-542

Abstract: In this paper we examine the optimal taxation problem in a two sector economy with heterogeneous agents. We show that in a steady state of this economy the optimal capital income tax rate can be different from zero. In this economy since capital and labour margins are interdependent, any difference in investment goods and consumption goods prices allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores the production efficiency condition.

Keywords: Optimal Taxation; Ramsey Problem; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: E6 H2 (search for similar items in EconPapers)
Date: 2010-02-16
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Citations: View citations in EconPapers (4)

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