Hostname: page-component-7c8c6479df-995ml Total loading time: 0 Render date: 2024-03-28T04:16:32.404Z Has data issue: false hasContentIssue false

ENTREPRENEURIAL LABOR AND CAPITAL TAXATION

Published online by Cambridge University Press:  20 September 2010

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.

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.

Type
Articles
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Albanesi, Stefania (2006) Optimal Taxation of Entrepreneurial Capital with Private Information. NBER Working paper 12419.CrossRefGoogle Scholar
Banks, James and Diamond, Peter (2008) The Base for Direct Taxation. Mirrlees Report, Institute for Fiscal Studies.CrossRefGoogle Scholar
Chamley, Christophe (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54, 607622.CrossRefGoogle Scholar
Correia, Isabel (1996) Should capital income be taxed in the steady state? Journal of Public Economics 60, 147151.CrossRefGoogle Scholar
Jones, Larry, Manuelli, Roberto, and Rossi, Peter (1997) On the optimal taxation of capital income. Journal of Economic Theory 73, 93117.CrossRefGoogle Scholar
Lucas, Robert Jr. and Stokey, Nancy (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12, 5593.CrossRefGoogle Scholar
Panousi, Vasia (2008) Capital Taxation with Entrepreneurial Risk. Mimeo, Federal Reserve Board.CrossRefGoogle Scholar