Production efficiency and profit taxation

Journal article: Consider a simple general equilibrium economy with one representative consumer, a single competitive firm and the government. Suppose that the government has to finance public expenditures using linear consumption taxes and/or a lump-sum tax on profits redistributed to the consumer. We show that, if the tax rate on profits cannot exceed 100 percent, one cannot improve upon the second-best optimum of an economy with constant returns to scale by using a less efficient profit-generating decreasing returns to scale technology.

Author(s)

Stéphane Gauthier, Guy Laroque

Journal
  • Social Choice and Welfare
Date of publication
  • 2019
Keywords JEL
H21
Pages
  • 215–223
Version
  • 1
Volume
  • 52