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Are Nash Tax Rates too Low or Too High? The Role of Endogenous Growth in Models with Public Goods

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  • George Economides

    (Athens University of Economics and Business and University of Cyprus)

  • Apostolis Philippopoulos

    (Athens University of Economics and Business)

Abstract

We reconsider the conventional wisdom that, in the presence of public goods, Nash tax rates are inefficiently low and decrease with the size of population. We use a general equilibrium dynamic model of a world economy, in which world-wide environmental quality has public good features. We show that the type of policy externality from one country to another (and hence whether we under-tax, or over-tax, in a Nash equilibrium relative to a cooperative one) can be reversed, when we introduce dynamics. Specifically, the policy externality changes from positive (which is the static, standard case) to negative, once the same model allows for long-term endogenous growth. This happens because in a growing economy, long-run capital tax bases are elastic so that a higher tax rate leads to lower economic growth, smaller tax bases, lower tax revenues, lower clean-up policy in each country, and this eventually generates a negative external effect upon other countries. Then, negative policy externalities imply that Nash tax rates are inefficiently high and increase with the size of population (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 1 (January)
Pages: 37-53

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Handle: RePEc:red:issued:v:6:y:2003:i:1:p:37-53

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Related research

Keywords: Public goods; externalities; endogenous growth; environment;

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References

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  1. Smulders, J.A., 1995. "Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-153411, Tilburg University.
  2. Ligthart, Jenny E. & van der Ploeg, Frederick, 1994. "Pollution, the cost of public funds and endogenous growth," Economics Letters, Elsevier, Elsevier, vol. 46(4), pages 339-349, December.
  3. Grossman, Gene M & Krueger, Alan B, 1995. "Economic Growth and the Environment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(2), pages 353-77, May.
  4. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "Endogenous growth theory: An introduction," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 1-22, January.
  5. David Bradford & Rebecca Schlieckert & Stephen H. Shore, 2000. "The Environmental Kuznets Curve: Exploring a Fresh Specification," CESifo Working Paper Series 367, CESifo Group Munich.
  6. Glomm, Gerhard & Lagunoff, Roger, 1999. "A Dynamic Tiebout Theory of Voluntary vs. Involuntary Provision of Public Goods," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 659-77, July.
  7. Søren Nielsen & Lars Pedersen & Peter Sørensen, 1995. "Environmental policy, pollution, unemployment, and endogenous growth," International Tax and Public Finance, Springer, Springer, vol. 2(2), pages 185-205, August.
  8. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(1), pages 183-204, January.
  9. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
  10. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 441-63, August.
  11. Tahvonen Olli & Kuuluvainen Jari, 1993. "Economic Growth, Pollution, and Renewable Resources," Journal of Environmental Economics and Management, Elsevier, vol. 24(2), pages 101-118, March.
  12. Bovenberg, A.L. & Smulders, S., 1993. "Environmental Quality and Pollution-Saving Technological Change in Two- Sector Endogenous Growth Model," Papers, Tilburg - Center for Economic Research 9321, Tilburg - Center for Economic Research.
  13. Oakland, William H., 1987. "Theory of public goods," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 9, pages 485-535 Elsevier.
  14. Benhabib, Jess & Velasco, Andres, 1996. "On the optimal and best sustainable taxes in an open economy," European Economic Review, Elsevier, Elsevier, vol. 40(1), pages 135-154, January.
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Citations

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Cited by:
  1. Pantelis Kammas, 2009. "Strategic fiscal interaction among OECD countries," EERI Research Paper Series EERI_RP_2009_11, Economics and Econometrics Research Institute (EERI), Brussels.
  2. George Economides & Apostolis Philippopoulos, 2005. "Should Green Governments Give Priority to Environmental Policies over Growth-Enhancing Policies?," CESifo Working Paper Series 1433, CESifo Group Munich.
  3. George Economides & Apostolis Philippopoulos, 2008. "Growth enhancing policy is the means to sustain the environment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 207-219, January.
  4. Pantelis Kammas & Apostolis Philippopoulos, 2010. "The Role of International Public Goods in Tax Cooperation," CESifo Economic Studies, CESifo, CESifo, vol. 56(2), pages 278-299, June.
  5. Charalampos Savvidis, 2011. "International positive production externalities under a transfer payment scheme – the case for cooperation," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 61(1-2), pages 80-117, June - Ja.
  6. Benjamin Lockwood & Marko Köthenbürger, 2007. "Does Tax Competition Really Promote Growth?," CESifo Working Paper Series 2102, CESifo Group Munich.

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