Optimal taxation of capital income with imperfectly competitive product markets

Jang-Ting Guo and Kevin Lansing

No 98-04, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

Abstract: We show that the steady-state optimal tax on capital income can be negative, positive, or zero in a neoclassical growth model that allows for imperfectly competitive product markets. The sign of the optimal tax rate depends crucially on (1) the degree of monopoly power, (2) the extent to which monopoly profits can be taxed, (3) the size of the depreciation allowance, and (4) the magnitude of government expenditures. For an empirically plausible set of parameters, we find that the steady-state optimal capital tax can range between -10 and 22%.

Keywords: Taxation; Capital; Income tax (search for similar items in EconPapers)
Date: 1998
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Published in Journal of Economic Dynamics & Control, v. 23, no. 7, June 1999

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