Imperfect Competition and Industry-Specific Input Taxes

Abstract

The article considers the role of industry-specific input taxes and aggregate production efficiency in economies with imperfect competition. It is first established that differentiated employment taxes can increase efficiency, and the determinants of the relative rates of such taxes are investigated. The employment of an industry will be taxed at a lower rate when that industry has low returns to scale and the tax-shifting effect is large. These findings are then combined with previous analysis of the taxation of final commodities and intermediate inputs. The results show that the optimal tax system will not, in general, maintain production efficiency. A charactertzation of optimal input taxes based on the elasticity of input demand is derived.

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