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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

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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Bibliographic Info

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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  1. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S., 1997. "Equilibrium dynamics in two-sector models of endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 115-143, January.
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Cited by:
  1. Bidisha Chakraborty & Manash Ranjan Gupta, 2006. "A Note on the Inclusion of Human Capital in the Lucas Model," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 211-224, December.
  2. Gustavo Marrero, 2010. "Tax-mix, public spending composition and growth," Journal of Economics, Springer, vol. 99(1), pages 29-51, February.
  3. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, vol. 63(2), pages 77-90, June.
  4. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on saving in a growth model," wp.comunite 0071, Department of Communication, University of Teramo.
  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. Scrimgeour, Dean, 2010. "Dynamic Scoring in a Romer-style Economy," Working Papers 2010-02, Department of Economics, Colgate University.
  7. Loretti I. Dobrescu & Mihaela Neamtu & Dumitru Opris, 2011. "Stability in a Three-Sector Dynamic Growth Model with Endogenous Labor Supply," Discussion Papers 2012-10, School of Economics, The University of New South Wales.

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