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Growth and welfare: Distorting versus non-distorting taxes

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  • Marrero, Gustavo A.
  • Novales, Alfonso

Abstract

Some concepts associated with the notion of public consumption could be considered as wasteful public expenditures, so that a firstbest analysis would set their level equal to zero every period. However, their ratio to output is significant and rather stable over time in actual economies. In an endogenous growth framework similar to Barro (1990), we analytically characterize the dependence of a second best public investment policy on wasteful public consumption. We compare two extreme tax systems: a distorting system and a nondistorting one. The presence of wasteful expenditures affect optimal public investment and the optimal public financing mechanism. Since private agents do not internalize the fact that by raising their capital accumulation they could be generating extra public investment and consumption, financing public expenditures through lump-sum taxes might lead to an excessive crowding-out impact on current consumption, which may sharply reduce welfare in the short-run as well as limit public capital accumulation and long-run growth. It turns out that this e?ect can be more damaging for growth and welfare than the disincentive created on private capital accumulation when taxing capital income.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 27 (2005)
Issue (Month): 3 (September)
Pages: 403-433

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Handle: RePEc:eee:jmacro:v:27:y:2005:i:3:p:403-433

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Web page: http://www.elsevier.com/locate/inca/622617

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Citations

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Cited by:
  1. Marrero, Gustavo A., 2008. "Revisiting The Optimal Stationary Public Investment Policy In Endogenous Growth Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 12(02), pages 172-194, April.
  2. Gustavo A. Marrero & Alfonso Novales, 2003. "Taxing or subsidizing Factors' rents in a simple endogenous growth model with public capital," Documentos de Trabajo del ICAE 0303, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  3. José Manuel González-Páramo & Diego Martínez López, . "Public Investment and Convergence in the Spanish Regions," Studies on the Spanish Economy 112, FEDEA.
  4. Thi Kim Cuong Pham, 2012. "Status-seeking and economic growth: the Barro model revisited," Working Papers of BETA 2012-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  5. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3348-3369, October.
  6. Andreas Irmen & Johanna Kuehnel, 2009. "Productive Government Expenditure And Economic Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 692-733, 09.
  7. Cavalcanti, Carlos B. & Marrero, Gustavo A. & Le, Tuan Minh, 2014. "Measuring the impact of debt-financed public investment," Policy Research Working Paper Series 6766, The World Bank.
  8. Gustavo Marrero, 2010. "Tax-mix, public spending composition and growth," Journal of Economics, Springer, vol. 99(1), pages 29-51, February.

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