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Sheikh Selim
 
''Optimal Taxation in a Two Sector Economy with Heterogeneous Agents''
( 2010, Vol. 30 No.1 )
 
 
In this paper we examine the optimal taxation problem in a two sector economy with heterogeneous agents. We show that in a steady state of this economy the optimal capital income tax rate can be different from zero. In this economy since capital and labour margins are interdependent, any difference in investment goods and consumption goods prices allows the government to tax capital income in one sector and undo the tax distortion by differential labour income taxation. This policy serves efficiency purpose as it restores the production efficiency condition.
 
 
Keywords: Optimal Taxation, Ramsey Problem, Heterogeneous Agents
JEL: E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
H2 - Taxation, Subsidies, and Revenue: General
 
Manuscript Received : Sep 14 2009 Manuscript Accepted : Feb 16 2010

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