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Social Choice and Welfare

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01.08.2018 | Original Paper

Production efficiency and profit taxation

verfasst von: Stéphane Gauthier, Guy Laroque

Erschienen in: Social Choice and Welfare | Ausgabe 2/2019

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Abstract

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 \(100\%\), 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.

Vorheriger Artikel The weighted-egalitarian Shapley values

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The literature provides us with many examples where production efficiency is not desirable in the presence of heterogeneity across agents. Sadka (1977) illustrates the desirability of production inefficiency when consumers own different shares of the firms (see also Dasgupta and Stiglitz (1972), page 96): it may be socially desirable to let a firm use a less efficient technology to favor the consumers who own this firm. The case of a single consumer in Mirrlees (1972) makes the property striking.

See Stiglitz and Dasgupta (1971), Hahn (1973), Sadka (1977), Munk (1978), or Blackorby and Brett (2004) for a discussion.

In another strand of the literature production inefficiency may be a way to alleviate informational asymmetries, by playing on factor prices as in Wilson (1982), Naito (1999) and Blackorby and Brett (2004) or on observable occupational choices as in Saez (2004) and Gomes et al. (2018). Production inefficiency also allows to deter tax evasion in Best et al. (2015).

We thank a referee for urging us to use a diagram similar to the one in Mirrlees (1972) to clarify the discussion.

Best M, Brockmeyer A, Kleven H, Spinnewijn J, Waseem M (2015) Production versus revenue efficiency with limited tax capacity: theory and evidence from Pakistan. J Polit Econ 123:1311–1355CrossRef

Blackorby C, Brett C (2004) Production efficiency and the direct–indirect tax mix. J Pub Econ Theory 6(1):165–180CrossRef

Blackorby C, Murty S (2009) Constraints on income distribution and production efficiency in economies with Ramsey taxation, Discussion paper, University of Warwick

Dasgupta P, Stiglitz J (1972) On optimal taxation and public production. Rev Econ Stud 39(1):87–103CrossRef

Diamond P, Mirrlees J (1971) Optimal taxation and public production. Am Econ Rev 61(1):8–27

Gomes R, Lozachmeur J-M, Pavan A (2018) Differential taxation and occupational choice. Rev Econ Studies 85:511–557CrossRef

Hahn F (1973) On optimum taxation. J Econ Theory 6:96–106CrossRef

Mirrlees J (1972) On producer taxation. Rev Econ Stud 39(1):105–111CrossRef

Munk K (1978) Optimal taxation and pure profit. Scand J Econ 80(1):1–19CrossRef

Murty S (2013) Production efficiency and constraints on profit taxation and profit distribution in economies with Ramsey taxation. Soc Choice Welf 41:579–604CrossRef

Naito H (1999) Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency. J Pub Econ 71:165–188CrossRef

Reinhorn L (2013) Production efficiency and excess supply. Math Soc Sci 65:92–100CrossRef

Sadka E (1977) A note on producer taxation and public production. Rev Econ Stud 44(2):385–387CrossRef

Saez E (2004) Direct or indirect tax Instruments for redistribution: short-run versus long-run. J Pub Econ 38(2):503–518CrossRef

Stiglitz J, Dasgupta P (1971) Differential taxation, public goods, and economic efficiency. Rev Econ Stud 38(2):151–174CrossRef

Wilson J (1982) The optimal public employment policy. J Pub Econ 17:241–258CrossRef

Titel: Production efficiency and profit taxation
verfasst von: Stéphane Gauthier
Guy Laroque
Publikationsdatum: 01.08.2018
Verlag: Springer Berlin Heidelberg
Erschienen in: Social Choice and Welfare / Ausgabe 2/2019
Print ISSN: 0176-1714
Elektronische ISSN: 1432-217X
DOI: https://doi.org/10.1007/s00355-018-1144-2

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