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Production efficiency and profit taxation

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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.

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Notes

  1. 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.

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

  3. 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).

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

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Author information

Authors and Affiliations

  1. PSE, University of Paris 1, 48 bd Jourdan, 75014, Paris, France

    Stéphane Gauthier

  2. Sciences-Po, Institute for Fiscal Studies, London, UK

    Stéphane Gauthier & Guy Laroque

  3. University College London, London, UK

    Guy Laroque

Authors
  1. Stéphane Gauthier
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  2. Guy Laroque
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Correspondence to Stéphane Gauthier.

Additional information

We benefited from the remarks and suggestions of Marc Fleurbaey and of two anonymous referees. We are grateful to Richard Blundell, Roger Guesnerie, David Martimort, Ian Preston, Johannes Spinnewijn and seminar participants at University of Paris 1, Paris School of Economics and University College London for their comments on earlier drafts of this paper. The usual disclaimers apply.

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Gauthier, S., Laroque, G. Production efficiency and profit taxation. Soc Choice Welf 52, 215–223 (2019). https://doi.org/10.1007/s00355-018-1144-2

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  • DOI: https://doi.org/10.1007/s00355-018-1144-2

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