Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245490 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9309
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that price and variety distortions resulting from the market structure imply that income tax policy needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that, when choosing optimal tax policy, the failure to account for the market structure results in a welfare loss of 1:77 percent. Motivated by practical cases, we study a policy regime that is solely based on income taxation. Under this policy regime, departures from the social optimum can be compensated by lower and less regressive income taxes than those obtained under the regime with all forms of taxation. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.
Subjects: 
tax policy
monopolistic competition
variety effect
consumer preferences
endogenous labor
JEL: 
D43
H21
L13
Document Type: 
Working Paper
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