Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70372 
Year of Publication: 
2000
Series/Report no.: 
Research Report No. 2000-17
Publisher: 
The University of Western Ontario, Department of Economics, London (Ontario)
Abstract: 
This paper examines the problem of optimal tax mix analytically in a two-sector growth model with transitional dynamics. Tax revenue is required to provide a pure public good. The key problems are: over-consumption of leisure under labor income or consumption taxes; and under-investment in human and physical capital under income taxes. Without investment subsidies, consumption taxes do better than uniform income taxes, but can be improved on locally via positive taxation of physical capital income and a negative tax on labor income. With subsidies the first best can be achieved in a system where: (i) consumption and labor income taxes are either zero or of the same rate but opposite signs; (ii) physical capital income taxes are used either exclusively or more heavily than labor income taxes when their rates are below 100%; and (iii) investment subsidy rates equal income tax rates for both forms of capital, respectively. In any given circumstances, a range of alternative tax mixes may provide equivalent results. This result, combined with practical constraints, may help to explain the variety of tax mixes observed across countries.
Subjects: 
growth
transitional dynamics
optimal taxation
subsidies
JEL: 
E60
H20
O40
Document Type: 
Working Paper

Files in This Item:
File
Size
689.54 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.