Optimal capital income taxation and distributions service

We show that in a multisector economy with perfectly competitive markets, in a steady state the optimal capital income tax rate is in general different from zero. If distributions service is a market good, the difference between buyer price of consumption and buyer price of investment is determined by the unit cost difference of distributing these and the market price for distributions service. We argue that if the buyer price difference is due to the market price of distributions service, it can induce inefficient levels of production and allocation of factors, which in turns violates production efficiency. We show that in a steady state of the Ramsey equilibrium, the optimal policy that involves a capital income tax/subsidy and different rates of labour income taxes can undo the relative price difference and can restore production efficiency