We find the optimal capital income tax rate in an imperfectly competitive economy, where the economic profit turns into private factor remuneration due to rent seeking activity. The optimal capital income tax offsets the difference between the marginal social and the marginal private returns to capital, which is a result of the rent seeking, and the wedge between the before tax interest rate and the marginal productivity of capital, which is a consequence of the imperfect competition. The optimal capital income tax rate depends neither on other taxes nor on the overall tax burden, and numerically it is close to zero.
- Optimal capital taxation
- Ramsey policy
- Rent seeking
ASJC Scopus subject areas
- Political Science and International Relations