As commercial integration reduces the reliance on foreign trade taxation, raising tax revenue has become a major concern for the governments of developing economies. This paper examines how the tax burden in a developing economy should be distributed between capital income and labor income. We study a two-sector model, where the traditional sector is “informal” and consequently cannot be taxed by the government. In this setup, we find that the optimal (second-best) tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income, and possibly more.

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his paper examines how economic activity and the distribution of income
are related in endogenous growth models. I examine the different implications of
models where inequality is due to differences in capital and labour endowments and
of those with different types of labour. I argue that the new growth literature has done
more than simply allow us to formalize old ideas: it emphasizes that growth and
distribution are jointly determined, and thus allows us to explore the distributional
implications of growth-enhancing policies. In contrast to the neoclassical framework,
the new literature implies that there in not necessarily a tradeoff between
redistribution and growth.

We present an explanation for the persistence of gender segregation in occupations and for the observed cross-country differences in its extent. Agents have imperfect information about their probability of success in different occupations and base their career choices on prior beliefs about these probabilities. Beliefs are updated according to Bayes's rule, implying that past differences in preferences over occupations across genders affect the beliefs of the current generation. Consequently, even when men and women become identical in their preferences, their career choices differ. Moreover, the way in which preferences change is shown to affect the degree of segregation.