An Analysis on Optimal Taxation and on Policy Changes in an Endogenous Growth Model with Public Expenditure (original) (raw)

The Welfare Cost of Taxation and Endogenous Growth

1992

The marginal efficiency costs of different taxes is analyzed in three models with endogenous growth, and the values are compared with those found in standard models. The models analyze how taxes affect (i) the trade-off between human capital accumulation and leisure, (ii) the intertemporal trade-off in consumption, and (iii) the trade-offs in a two-sector model. In general, the efficiency cost in models with endogenous growth may be greater or lower than in models with exogenous growth. When the value of the efficiency cost is very large, it is found to be very sensitive to the specification of the model, and it is reduced dramatically when government expenditures are a production input. In the two-sector model, the only tax which has a very high efficiency cost is the tax on time spent for human capital accumulation, and it may not be empirically important. It is verified that a positive impact of a tax reform on the long-term growth rate is not indicative of welfare improvement.

Optimal taxation in an endogenous growth model with government supplied educational capital

Government expenditures are large when measured as a proportion of government spending or relative to GNP. This fact is incorporated into an endogenous growth model in which education produces new human capital. Capital in the education sector is provided by government and nanced by distortionary taxes. To incorporate property taxes, an important source of revenues for schooling, household production is incorporated into the model with household capital representing the property tax base. The model is calibrated to match key rst moment properties of the post-war U.S. economy. Di erent mixes of labor income, capital income and property taxes are analyzed with regard to their consequences for the welfare of the representative household. In general, taxes have two opposing e ects: higher taxes tend to retard growth and reduce welfare; however, when used to nance educational expenditures, taxes promote human capital accumulation and so growth which is welfare-enhancing.

Optimal tax policy in an endogenous growth model with a consumable service good

Ekonomski anali

The paper analyses the optimal tax policy in an endogenous growth model in a command economy, where the commodity output is produced with only physical capital, and skilled labour is the only input in producing the service good. In the benchmark model, per capita government expenditure is used to create human capital. Two cases are considered regarding taxation: in the first, tax is imposed on both commodity and service sectors, while in the second only the service sector is taxed. In each case the model derives the optimal tax rate and steady-state growth paths. In the first regime where both sectors are taxed we find the optimal tax rate on the service sector to be zero, but on commodity output it is positive. However, in the second regime there is also a unique optimal tax rate on the service sector to finance human capital accumulation. Comparing the growth rates in both cases we also observe that the imposition of tax on only the service sector instead of on both sectors yields a higher rate of growth if the population growth rate along with the marginal productivity of human capital is sufficiently high. We also show that when the service sector is taxed it may grow at a higher rate than the manufacturing sector. An extension of the benchmark model in which government spends tax revenue on accumulation of human capital as well as physical capital confirms that the optimal service tax rate is zero, but the optimal commodity tax rate is positive when both sectors are taxed.

Progressive Taxation, Public Capital, and Endogenous Growth

Finanzarchiv, 2006

This paper presents and analyzes an endogenous growth model with public capital and progressive taxation. Two versions are considered: The first versions assumes that the budget of the government is balanced at each point of time. The second allows for public debt but asserts that the ratio of the primary surplus to gross domestic income is a positive linear function of the debt income ratio which guarantees that public debt is sustainable. The paper then derives necessary conditions for the existence of a sustainable balanced growth path for the analytical model. Further, simulations are undertaken in order to gain insight into growth effects of varying the slope of the tax schedule and in order to find how the tax scheme affects the dynamics of the model.

The Costs of Increasing the Fertility Rate in an Endogenous Growth Model

2013

In this paper, we apply an Overlapping Generations (OLG) model with endogenous fertility and a pay as you go (PAYG) pension system to find out what are the economic consequences of different policy measures to increase the number of children. Especially, we take into account the introduction of a child dependent PAYG pension system, child allowances financed by a labor income tax, and a reduction of the child rearing costs. Some authors have shown that in small open economies with exogenous growth it is possible to increase the fertility without harming any generation. Here we show that this is impossible in a model with endogenous growth.

Fiscal Policy in an Endogenous Growth Model with Productive Government Spending

Metroeconomica, 1999

The goal of this paper is to analyse the effects of ®scal policy upon the long-run balanced growth rate in an endogenous growth model in which sustained per capita growth is the result of productive government spending. Assuming that labour is supplied inelastically, it is shown that increases in non-productive government spending, i.e. public consumption or lump-sum transfers, always reduce the balanced growth rate, whereas there exists a growth-maximizing investment subsidy rate and income tax rate. Moreover, a rise in a tax on consumption increases economic growth if it raises public investment. If labour supply is elastic the elasticity of labour supply crucially determines the growth-maximizing income tax rate and an increase in the tax on consumption may raise or lower economic growth. Ã I thank two anonymous referees for detailed comments on an earlier version. Financial support from the Deutsche Forschungsgemeinschaft (DFG) is gratefully acknowledged.

The optimal fiscal policy in a OLG model with endogenous fertility

In this paper we show that, when endogenous fertility choices are accounted for, the traditional rule provided by Diamond (1965) should be amended in order to effectively implement the first best allocation of an OLG economy, even in the presence a non distortionary tax for financing national debt. With Cobb-Douglas preferences and fixed costs for rearing children, it turns out that the implementable equilibrium is in general suboptimal and dynamically inefficient (i.e. with overaccumulation of physical capital). The reason for this result is that, when fertility choices are taken as endogenous, a further policy instrument is necessary for controlling it: in this respect, by combining a lump sum tax upon the young adult with a subsidy for each child or with a lump sum trasfer to the old, the first best allocation can be implemented.

Optimal tax, debt, and expenditure policies in a growing economy

Journal of Public Economics, 1996

This paper employs an endogenous growth model to analyze the role of a consumption tax in enhancing growth and welfare. Provided government expenditure impacts directly on the decisions of private agents, two fiscal instruments are necessary to replicate the first best optimum. The tradeoff between consumption and income taxes to achieve this outcome is discussed and shown to depend upon the degree of congestion associated with the public good and the level of government expenditure relative to its social optimum. In general, the analysis suggests a potentially important role for a consumption tax as part of an overall optimal fiscal package.

OPTIMAL FISCAL AND TAX POLICIES IN A GENERAL EQUILIBRIUM MODEL OF GROWTH

2004

Abstract: This paper continues the study of optimal second-best economic policy in a growing general equilibrium economy. It considers the case in which a benevolent Ramseytype government chooses optimally the income tax rate, as well as the allocation of the collected tax revenue among public consumption services, public investment and transfer payments. It then studies the properties of the chosen policies and their implications for the macro economy. Keywords: Second-best policy; Growth; General equilibrium.