Abstract
This paper examines the optimal tax base in the profits tax with tangible and intangible capital and with positive external effects from investment in intangible capital. It is found that the optimal tax base adjustments for the two types of capital are determined by a compromise between the Ramsey argument for differential taxation associated with differences in demand and supply elasticities on the one hand, and the Pigouvian argument for subsidizing factors with public goods elements on the other.
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