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Production efficiency and profit taxation

Author

Listed:
  • Stéphane Gauthier

    (Institute for Fiscal Studies and University of Paris 1 Pantheon-Sorbonne and Paris School of Economics)

  • Guy Laroque

    (Institute for Fiscal Studies and Sciences Po, Paris and University College London)

Abstract

Consider a simple general equilibrium economy with one representative consumer, a single competitive ?rm and the government. Suppose that the government has to ?nance public expenditures using linear consumption taxes and/or a lump-sum tax on pro?ts redistributed to the consumer. We show that, if the tax rate on pro?ts cannot exceed 100 percent, one cannot improve upon the second-best optimum of an economy with constant returns to scale by using a less e?cient pro?t-generating decreasing returns to scale technology.

Suggested Citation

  • Stéphane Gauthier & Guy Laroque, 2018. "Production efficiency and profit taxation," IFS Working Papers W18/13, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:18/13
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    References listed on IDEAS

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    1. Saez, Emmanuel, 2004. "Direct or indirect tax instruments for redistribution: short-run versus long-run," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 503-518, March.
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    Keywords

    optimal taxation; taxation of pro?ts; production e?ciency;
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