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OPTIMAL CAPITAL TAXES FOR PUBLIC GOOD PROVISION *
Author(s) -
Michael Michael S.
Publication year - 1996
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.1996.tb00637.x
Subject(s) - economics , public good , social welfare function , microeconomics , consumption (sociology) , capital (architecture) , optimal tax , welfare , tax revenue , tax rate , private good , marginal cost of capital schedule , revenue , public economics , marginal cost , monetary economics , tax reform , finance , state income tax , market economy , gross income , social science , archaeology , sociology , history
This paper constructs a general equilibrium trade model of a small open economy that produces many traded private goods and one non‐traded public consumption good. Trade in goods is free, but the country taxes the internationally mobile capital to finance the provision of the public good. Within this framework, the paper identifies the conditions under which the optimal policy on the internationally mobile capital calls for a tax. Under the assumptions that (i) the welfare function is concave with respect to the tax rate, and (ii) the net revenue‐maximizing capital tax rate is positive, it is shown that the marginal cost of the public good always understates its social marginal cost.