Optimal Taxation in Dynamic Economies with Increasing Returns

Kazuo Mino

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies optimal taxation in dynamic economies with increasing returns. We show that if there exists a stable open-loop Stackelberg equilibrium, the optimal rate of tax on capital income in the steady state is negative in order to eliminate the wedge between the private and the social rate of return to capital. This result also holds when the government expenditure has a positive effect on production activities of the private agents. In contrast, if the government takes a feedback strategy and if the government budget is balanced in every period, then the optimal capital income taxation rule obtained under the open-loop strategy may be violated. It is, however, shown that if the government can borrow from the public, the negative capital income tax rule may be established even under the feedback policy rule.

Keywords: optimal tax; increasing returns; differential game; open- loop policy; feedback policy (search for similar items in EconPapers)
JEL-codes: C90 H21 H23 (search for similar items in EconPapers)
Date: 2000-02
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Citations: View citations in EconPapers (1)

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Journal Article: Optimal taxation in dynamic economies with increasing returns (2001)
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