Imperfect Competition and Optimal Taxation

Abstract

This paper provides optimal labor and dividend income taxation in a general equilibrium model with oligopolistic competition and endogenous …rms'entry. In the long run the optimal dividend income tax corrects for ine¢ cient entry. The dividend income tax depends on the form of competition and nature of the sunk entry costs. In particular, it is higher in market structures characterized by competition in quantities with respect to those characterized by price competition. Oligopolistic competition leads to an endogenous countercyclical price markup. As a result o¤set-ting the distortions over the business cycle requires deviations from full tax smoothing. JEL Classi…cation Numbers: E62, L13.