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Second-Best Optimal Taxation of Capital and Labor in a Developing Economy

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  • Cecilia Garcia-Penalosa
  • Stephen Turnovsky

Abstract

This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is "informal" and consequently cannot be taxed by the government. In this set up, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Cecilia Garcia-Penalosa & Stephen Turnovsky, 2004. "Second-Best Optimal Taxation of Capital and Labor in a Developing Economy," Working Papers UWEC-2004-05-P, University of Washington, Department of Economics, revised Apr 2004.
    • Handle: RePEc:udb:wpaper:uwec-2004-05-p
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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