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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.
Authors
Guy Laroque
Research Associate University of Paris 1 Pantheon-Sorbonne and Paris School of Economics
Stéphane is a Research Associate at our Institute and a Professor of Economics at University of Paris 1 Panthéon-Sorbonne.
Working Paper details
- DOI
- 10.1920/wp.ifs.2018.W1813
- Publisher
- The IFS
Suggested citation
Gauthier, S and Laroque, G. (2018). Production efficiency and profit taxation. London: The IFS. Available at: https://ifs.org.uk/publications/production-efficiency-and-profit-taxation (accessed: 20 April 2024).
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