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Growth, Employment and Taxation with Distortions in the Goods and Labour Market

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  • Werner Roeger

Abstract

. This paper analyses taxation in the presence of distortions in goods and labour markets in an endogenous growth model. The government disposes of capital, labour and consumption taxes. It is shown that the market solution leads to suboptimally low levels of growth and employment. However, available tax instruments are sufficient to attain the first‐best growth path in this economy. The paper further explores the relative distortion of capital and labour taxes. For plausible parametrisations of the model, lowering capital taxes dominate reductions in labour taxes in welfare terms.

Suggested Citation

  • Werner Roeger, 2007. "Growth, Employment and Taxation with Distortions in the Goods and Labour Market," German Economic Review, Verein für Socialpolitik, vol. 8(1), pages 1-27, February.
    • Handle: RePEc:bla:germec:v:8:y:2007:i:1:p:1-27
    DOI: 10.1111/j.1468-0475.2007.00131.x
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    Cited by:

    1. Alfred Greiner & Peter Flaschel, 2010. "Public Debt And Public Investment In An Endogenous Growth Model With Real Wage Rigidities," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 68-84, February.

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