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On Taxation in a Two-Sector Endogenous Growth Model with Endogenous Labor Supply

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Paul A. de Hek

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Abstract

This paper studies the effects of taxation on long-run growth in a two-sector endogenous growth model with (i) physical capital as an input in the education sector and (ii) leisure as an additional argument in the utility function. Due to the flexibility of labor supply, taxation of income may induce agents to spend more or less time on leisure activities. Income taxation - the same rate applies for capital and labor income - reduces the growth rate. The contribution of endogenous leisure in this case is confined to reducing or increasing the size of the effect on the growth rate. The same is true if only labor income is taxed. However, if only capital income is taxed, the sign of the effect may reverse. In that case, the positive effect of the increase in total non-leisure time dominates the direct negative effect, implying that capital taxation increases the long-run growth rate.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c010_010.

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Length: 38 pages JEL Classification: E20, H20, J22, J24, O41
Date of creation: Jun 2005
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Handle: RePEc:deg:conpap:c010_010

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  2. Christophe Chamley, 1992. "The Welfare Cost of Taxation and Endogenous Growth," Boston University - Institute for Economic Development 30, Boston University, Institute for Economic Development.
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  6. Mino, Kazuo, 1996. "Analysis of a Two-Sector Model of Endogenous Growth with Capital Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 227-51, February.
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  8. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November. [Downloadable!] (restricted)
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  11. Smith, William T., 1996. "Taxes, uncertainty, and long-term growth," European Economic Review, Elsevier, vol. 40(8), pages 1647-1664, November. [Downloadable!] (restricted)
  12. de Hek, Paul A., 1998. "An aggregative model of capital accumulation with leisure-dependent utility," Journal of Economic Dynamics and Control, Elsevier, vol. 23(2), pages 255-276, September. [Downloadable!] (restricted)
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  15. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
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  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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(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. Karzanova Irina, 2005. "Impact of tax regime on real sector investment in Russia: marginal effective tax rates for physical, human and R&D capital," EERC Working Paper Series 05-16e, EERC Research Network, Russia and CIS. [Downloadable!]
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