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Growth and Welfare Analysis of Tax Progressivity in a Heterogeneous-Agent Model

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Author Info
Elizabeth M. Caucutt (University of Rochester)
Selahattin Imrohoroglu (University of Southern California)
Krishna B. Kumar (University of Southern California)

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Abstract

In this paper, we use a general equilibrium model of endogenous growth in which there is heterogeneity in skill, income, and tax rates to evaluate the effect of progressivity of taxes on growth and welfare. In this framework, changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Experiments on a calibrated model indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the "engine" of growth - an external effect arising from production activities of skilled workers or intentional employment of skilled workers for research and other productivity enhancing activities - has an important effect on the impact of a change in progressivity. Welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equilibria; however, when the costs of transition to the higher growth equilibrium are taken into account, only the currently skilled slightly prefer the flat system. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/S1094-2025(03)00013-9
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 3 (July)
Pages: 546-577
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Handle: RePEc:red:issued:v:6:y:2003:i:3:p:546-577

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Related research
Keywords: tax progressivity; skill accumulation; human capital externality;

Other versions of this item:

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Heinz Handler & Andreas Knabe & Bertrand Koebel & Margit Schratzenstaller & Sven Wehke, 2005. "The Impact of Public Budgets on Overall Productivity Growth," WIFO Working Papers 255, WIFO. [Downloadable!]
  2. Juan Carlos Conesa & Dirk Krueger, 2005. "On the Optimal Progressivity of the Income Tax Code," CFS Working Paper Series 2005/10, Center for Financial Studies. [Downloadable!]
    Other versions:
  3. Cecilia García-Peñalosa & Jean-François Wen, 2008. "Redistribution and entrepreneurship with Schumpeterian growth," Journal of Economic Growth, Springer, vol. 13(1), pages 57-80, March. [Downloadable!] (restricted)
  4. Steven P. Cassou & Kevin J. Lansing, 2002. "Tax reform and public-sector expenditures," Working Papers in Applied Economic Theory and Econometrics 98-09, Federal Reserve Bank of San Francisco. [Downloadable!]
  5. Cecilia Garcia-Peñalosa & Jean-François Wen, 2004. "Redistribution and Occupational Choice in a Schumpeterian Growth Model," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Patrick Pintus, 2004. "International Capital Mobility and Aggregate Volatility: the Case of Credit-Rationed Open Economies," Computing in Economics and Finance 2004 193, Society for Computational Economics. [Downloadable!]
  7. R. Alison Felix, 2007. "The incidence of capital taxation and the magnitude of its burden," Regional Research Working Paper RRWP 07-02, Federal Reserve Bank of Kansas City. [Downloadable!]
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