Organizational Capital and Optimal Ramsey Taxation

Abstract

Many recent studies have argued that it is useful to introduce a third input into the neoclassical production technology which encapsulates the productivity enhancing knowledge created in the process of production. This input, often called organizational capital, has been shown to improve the predictions of dynamic general equilibrium models, especially at the business cycle frequency. In this paper, we study the impact of organizational capital on optimal capital taxation in the Ramsey tradition and find that the planner would choose to tax capital income in the presence of organizational capital even in environments where earlier models predicted zero taxes or even subsidies.optimal taxation, Ramsey model, learning-by-doing, organizational capital