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Optimal asymmetric taxation in a two-sector model with population ageing

Igor Fedotenkov

No 15, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.

Keywords: Two sectors; factor mobility; asymmetric taxation; optimality (search for similar items in EconPapers)
JEL-codes: E62 H21 J10 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-10-21
New Economics Papers: this item is included in nep-age, nep-mac and nep-pub
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Working Paper: Optimal asymmetric taxation in a two-sector model with population ageing (2015) Downloads
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