Abstract
We provide a welfare based interpretation of the capital tax ambiguity result (due to Guo and Lansing, 1999). We show that the sign ambiguity of optimal capital tax rate in an imperfectly competitive economy is mainly due to the welfare cost of investment. The substitution and income effects of profit seeking investment reinforce each other which creates a deadweight loss in welfare. Investors cannot perceive this effect and never invest at the right level. This loss is perceived only by the government which motivates capital taxation.
| Original language | English |
|---|---|
| Pages (from-to) | 37-48 |
| Journal | Quantitative and Qualitative Analysis in Social Sciences |
| Volume | 5 |
| Issue number | 1 |
| Publication status | Published - 2011 |
Keywords
- optimal taxation
- monopoly power
- Ramsey policy
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)