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ENTREPRENEURIAL LABOR AND CAPITAL TAXATION

Published online by Cambridge University Press:  20 September 2010

Catarina Reis
Catarina Reis*
Affiliation:
Universidade Catolica Portuguesa
*
Address correspondence to: Catarina Reis, Universidade Catolica Portuguesa, FCEE-Palma de Cima, 1649-023 Lisbon, Portugal; e-mail: creis@fcee.ucp.pt.
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Abstract

This paper considers a Ramsey model of linear taxation for an economy with capital and two kinds of labor. If the government cannot distinguish between the return from capital and the return from entrepreneurial labor, then there will be positive capital income taxation, even in the long run. This happens because the only way to tax entrepreneurial labor is by also taxing capital. Furthermore, under fairly general conditions, the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive. Thus, even though both income taxes are positive, imposing uniform income taxation would lead to additional distortions in the economy.

Keywords

Fiscal PolicyOptimal TaxationIncidence
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 3 , June 2011 , pp. 326 - 335
Copyright
Copyright © Cambridge University Press 2010

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References

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