The Optimal Capital Gains Tax Rate under Rent-Seeking Behavior: An Optimal Control Approach with Evidence from Iran

Khalili Baseri, Farzad; Samadi, Ali Hussein; Shahnazi, Rohollah

doi:10.48308/jep.2025.239852.1224

The Optimal Capital Gains Tax Rate under Rent-Seeking Behavior: An Optimal Control Approach with Evidence from Iran

Document Type : Original Article

Authors

Department of Economics, Shiraz University, Fars, Iran

10.48308/jep.2025.239852.1224

Abstract

One of the emerging tax bases worldwide is the capital gains tax, which has been proposed in Iran as a measure to curb speculative activities. Taxes and their rates can significantly influence individuals’ economic status, overall societal growth, and social welfare. Consequently, setting appropriate tax rates has long been a complex and debated issue globally. Various factors influence tax rates and the extent to which they achieve their intended objectives, one of the most important being rent seeking. This study investigates the optimal rate of capital gains tax under rent-seeking conditions in Iran. Since this tax is a relatively new concept in the Iranian economy and has not yet been implemented, no empirical data are available for direct analysis. Therefore, the Pontryagin maximum principle is applied in this research. First, a model of an economy characterized by imperfect competition and rent-seeking behavior is developed. The model is then solved theoretically and calibrated using parameters relevant to the Iranian economy. The results indicate that a higher share of capital involved in rent-seeking activities increases the optimal capital gains tax rate. Additionally, an increase in the inflation-adjusted net return on unproductive activities also leads to a higher optimal tax rate.

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