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Monopoly Power and Optimal Taxation of Labor Income

Sheikh Tareq Selim
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Sheikh Tareq Selim: Cardiff University

Macroeconomics from EconWPA

Abstract: This paper studies the Ramsey problem of optimal labor income taxation in a simple model economy which deviates from a first best representative agent economy in three important aspects, namely, flat rate second best tax, monopoly power in intermediate product market, and monopolistic wage setting. There are three key findings: (1) In order to correct for monopoly distortion the Ramsey tax prescription is to set the labor income tax rate lower than its competitive market analogue; (2) Government’s optimal tax policy is independent of its fiscal treatment of distributed pure profits; and (3) For higher levels of monopoly distortions Ramsey policy is more desirable than the first best policy. The key analytical results are verified by a calibration which fits the model to the stylized facts of the US economy.

Keywords: Optimal taxation; Monopoly power; Ramsey policy (search for similar items in EconPapers)
JEL-codes: H21 H30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-pbe
Date: 2005-11-01
Note: Type of Document - pdf; pages: 33. Cardiff Economics Working Paper Series
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