Production Efficiency and Profit Taxation

Pre-print, Working paper: 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. This note shows 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

Date of publication
  • 2017
Keywords JEL
H21
Keywords
  • Optimal taxation
  • Taxation of profits
  • Production efficiency
Internal reference
  • PSE Working Papers n°2017-45
Version
  • 1