Tax on name

Abstract

How to tax the name? We answer this question by introducing a name market in the sense of Tadelis (1999) into an endogenous growth model in which an informational asymmetry exists between capital producing borrowers and lenders. We show a name market endogenously arises to screen the borrowers but at the cost of crowding out investment. We derive the optimal name price that trades off the screening effect and the crowding out effect and show this optimal price decreases with the investor protection level. An optimal tax scheme should tax the name to this optimal price and reimburse the tax revenue to the name buyer. When the investor protection level is low, the net worth could be lower than the optimal name price, so capital income tax shall be allowed to subsidy the name purchase to activate the name market. Overall, we show the optimal tax scheme in the presence of a name market depends crucially on the country’s investor protection level.