Optimal taxation and firm formation:: A model of asymmetric information

Abstract This paper analyzes non-linear optimal taxation under asymmetric information in a general equilibrium model with endogenous firm formation. It first shows, under a weak separability assumption on technologies, that output and input taxes are not necessary if profits are optimally taxed. It then examines the progressivity (or lack of it) of the optimal profit tax and describes the corresponding effects on the structure of the production sector relative to the first-best solution. Finally, the paper investigates conditions under which the provision of public goods can be decentralized.

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