Optimal Taxation in a Two-sector Economy with Heterogeneous Agents

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Authors

Colleges, School and Institutes

Abstract

In this paper we examine the optimal taxation problem in a two sector economy with heterogeneous agents. We show that in a steady state of this economy the optimal capital income tax rate can be different from zero. In this economy since capital and labour margins are interdependent, any difference in investment goods and consumption goods prices allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores the production efficiency condition.

Details

Original languageEnglish
Pages (from-to)534-542
JournalEconomics Bulletin
Volume30
Issue number1
Publication statusPublished - 2010