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Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market

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  • Ho, Wai-Hong
  • Wang, Yong

Abstract

This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives.

Suggested Citation

  • Ho, Wai-Hong & Wang, Yong, 2009. "Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market," MPRA Paper 17040, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17040
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital income taxation; Asymmetric information; Economic growth;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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