Optimal taxation with commitment in a two sector neoclassical economy

Selim, Sheikh ORCID: https://orcid.org/0000-0002-7931-092X 2005. Optimal taxation with commitment in a two sector neoclassical economy. Presented at: Royal Economic Society Annual Conference 2005, Nottingham, UK, 21-23 March 2005.

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Abstract

This paper examines dynamic optimal income taxation problem in a two-sector neoclassical model where the government is able to commit to a sequence of tax plans for future. It finds that (1) while it is optimal to set a zero long run capital tax for the capital goods sector, steady state optimal capital tax can be nonzero in the consumption goods sector; (2) if the government faces an ex ante constraint of setting equal factor income taxes, the optimal levels of both capital tax rates are nonzero. The distortion created by the nonzero capital tax in consumption goods sector, given the other capital tax is set at zero, is in no way explosive in nature, since economic agents can avoid the compounding tax liabilities simply by shifting depreciated capital. The paper examines the optimal steady state capital tax in consumption goods sector with three popular classes of utility functions and finds that the set of conditions under which this tax is zero is in no way inferred by the model.

Item Type:	Conference or Workshop Item (Paper)
Date Type:	Completion
Status:	Unpublished
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory
Uncontrolled Keywords:	Optimal taxation; Ramsey problem; Primal approach; Two-sector model.
Last Modified:	24 Oct 2022 11:41
URI:	https://orca.cardiff.ac.uk/id/eprint/49026

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