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Factor taxation and labor supply in a dynamic one-sector growth model

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  • Chen, Been-Lon

Abstract

This paper studies a class of AK-type growth models with public capital stock and elastic labor supply. The government taxes both factor incomes and conduct expenditure. To rationalize the taxation, government expenditure affects the productivity of private sectors. It shows the existence of a unique balanced-growth path, near which there is only a transitional dynamic path leading the economy toward it. While a higher capital tax rate reduces economic growth in the short run, the long-term growth effect is ambiguous, and this long-term growth effect remains ambiguous even if the level of tax rate is larger than the degree of government externality. A higher labor income tax rate has equally ambiguous growth effects both in the short and long runs. However, if the intertemporal elasticity of substitution for labor supply is small enough, a higher labor tax rate always lowers economic growth in the long run, despite the existence of productive government taxation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 12 (December)
Pages: 3941-3964

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:12:p:3941-3964

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Citations

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Cited by:
  1. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/826, Ghent University, Faculty of Economics and Business Administration.
  2. Ho, Wai-Hong & Wang, Yong, 2009. "Capital Income Taxation Revisited: The Role of Information Asymmetry in the Credit Market," MPRA Paper 17040, University Library of Munich, Germany.
  3. Peter McGregor & Patrizio Lecca & Kim Swales, 2012. "Balanced Budget Government Spending in a Small Open Regional Economy," ERSA conference papers ersa12p1009, European Regional Science Association.
  4. Chen, Been-Lon & Chen, Hung-Ju & Wang, Ping, 2011. "Taxing capital is not a bad idea indeed: the role of human capital and labor-market frictions," MPRA Paper 33209, University Library of Munich, Germany.
  5. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on saving in a growth model," wp.comunite 0071, Department of Communication, University of Teramo.

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