Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation

Sushama Murty ()

No 1010, Discussion Papers from University of Exeter, Department of Economics

Abstract: In economies with Ramsey taxation, decreasing returns to scale, and private ownership, we show that second-best production efficiency is desirable when profit tax rates vary across groups of firms provided that the institutional rules which define profit incomes of consumers depend on the distribution of profits across these groups of firms. The classic results of Dasgupta and Stiglitz [1972] (of firm-specific profit taxation) and Diamond and Mirrlees [1971] and Guesnerie [1995] (of uniform one-hundred percent profit taxation) follow as special cases of our model. Moreover, second-best analysis suggests the desirability of proportionate taxation of inter-firm transactions in the absence of profit taxes. Alternatively, it recommends profit taxation as a perfect substitute for intermediate-input taxation. The analysis also suggests that, combined with the knowledge of the distribution of profit incomes in the economy, profit taxation can promote both efficiency and redistributive objectives of the government.

Keywords: Ramsey taxation; private ownership; profit taxation; production inefficiency; general equilibrium (search for similar items in EconPapers)
JEL-codes: H21 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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