Nonoptimality of the Friedman Rule with Capital Income Taxation | Zendy

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Nonoptimality of the Friedman Rule with Capital Income Taxation

Author(s) -

PETRUCCI ALBERTO

Publication year - 2011

Publication title -

journal of money, credit and banking

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 1.763

H-Index - 108

eISSN - 1538-4616

pISSN - 0022-2879

DOI - 10.1111/j.1538-4616.2010.00369.x

Subject(s) - economics , capital (architecture) , inflation (cosmology) , production (economics) , economic rent , capital income , monetary economics , microeconomics , international taxation , macroeconomics , tax reform , public economics , physics , archaeology , theoretical physics , history

This paper studies the efficient taxation of money and factor income in intertemporal optimizing growth models with infinite horizons, transaction costs technologies, and flexible prices. Second‐best optimality calls for a positive inflation tax and a nonzero capital income tax when there are restrictions on taxation of production factors or profits/rents. Our cases of nonoptimality of the Friedman rule—which differ from those of Mulligan and Sala‐i‐Martin (1997) and extend substantially those of Schmitt‐Grohè and Uribe (2004a)—follow from the violation of the Diamond and Mirrlees (1971) principle on production efficiency.

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