Optimal Mixed Taxation and Market Power in a Dynamic Economy

Thomas Aronsson () and Ron Wendner
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Thomas Aronsson: Umea University, Sweden

No 2026-03, Graz Economics Papers from University of Graz, Department of Economics

Abstract: This paper develops a dynamic model of optimal mixed taxation in a small open economy with two goods markets; one characterized by perfect competition and the other by market power on the production side. The purpose is to examine how the existence of market power affects the optimal structure of income, commodity, and production taxes. We show that a distortion created by monopoly power can either be targeted through a production subsidy or a reduction in the commodity tax. In turn, this means that the policy rules for marginal labor income taxation and marginal capital income taxation take the same forms as under perfect competition. We also show that the results on marginal income taxation carry over to the case of oligopolistic competition if (i) the firms are identical or (ii) their market shares are observable.

Keywords: Income taxation; commodity taxation; redistribution; market power (search for similar items in EconPapers)
JEL-codes: D42 H21 H25 (search for similar items in EconPapers)
Date: 2026-03
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Working Paper: Optimal Mixed Taxation and Market Power in a Dynamic Economy (2026)
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