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The Effects of Factor Taxation in a Two-Sector Model of Endogenous Growth

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  • Michael B. Devereux
  • David R. F. Love

Abstract

This paper examines the effects of taxation in a two-sector model of endogenous growth, based on the joint accumulation of physical and human capital. Both transitional dynamics and balanced growth paths are computed, and the response to wage taxes, capital taxes, and consumption taxes is explored. Welfare costs of alternative tax regimes are computed. The capital tax is by far the least efficient method of generating revenue. The differences between taxes with respect to their effects on long-run growth rates are relatively unimportant. The key difference between the capital tax and wage or consumption taxes lies in their different level effects on the permanent paths of output, consumption, and labour supply.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 27 (1994)
Issue (Month): 3 (August)
Pages: 509-36

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Handle: RePEc:cje:issued:v:27:y:1994:i:3:p:509-36

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Postal: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4
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