Optimal and maximal taxation within and among industries with various degrees of competitiveness

Abstract

The optimal commodity taxation problem is examined in a model of the economy which consists of both perfectly and imperfectly competitive industries. The number of possible tax instruments is expanded by including license fees and a profits tax in addition to unit and ad valorem excise taxes. Three types of industries are analyzed: a perfectly competitive industry, a monopolistically competitive industry, and a single-plant monopolist. Within monopolistic competition, there are two distinct industry equilibria considered;Each type of industry is considered separately in a partial-equilibrium framework and the results are extended to the general-equilibrium optimal taxation problem. For each market structure, the characteristics of its optimal taxation path are described; for all possible required levels of tax collections, the optimal adjustment of output per-firm, industry sales, and the number of firms is determined. That tax or combination of taxes which moves each industry along this optimal path is then examined. Attention is also given to maximal taxation schemes;A major focus of previous analyses has been on the optimal configuration of excise rates among perfectly competitive industries. It is shown that a single excise tax can both optimally and maximally tax a perfectly competitive industry. However, a combination of taxes is usually required for optimal taxation in imperfectly competitive markets. These optimal schemes generally consist of a simultaneous tax and a subsidy. Moreover, while optimal taxation usually requires a combination of taxes, a single tax can often maximize collections. In general, the tax instruments required for optimal and maximal taxation are identified and shown to depend on the particular type of market structure which is taxed.