Organizational capital and optimal Ramsey taxation

Many recent studies have argued that it is useful to introduce a third input into the neoclassical production technology which encapsulates productivity enhancing knowledge created in process of production. This input, often called organizational capital, has been shown improve predictions dynamic general equilibrium models, especially at business cycle frequency. In this paper, we study impact capital on optimal taxation Ramsey tradition and find planner would behave quite differently presence than its absence. We use simulations show income tax different from zero environments where earlier models predicted taxes or even subsidies. model, both labor distort accumulation must trade off these distortions fund obligations government. As result, chooses positive capital. Generally lower while higher absence