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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

    ()
    (Faculty of Economics, Erasmus University Rotterdam)

Abstract

This paper examines the effects of taxation on long-run growthin a two-sector endogenous growth model with (i) physical capitalas an input in the education sector and (ii) leisure as anadditional argument in the utility function. The analysis of theeffects of taxation - including income taxation, capital incometaxation and labor income taxation - distinguishes between thecase with a unique (interior) balanced growth path and the casewith multiple balanced growth paths. Due to the flexibility oflabor supply, taxation of income may induce agents to spend moreor less time on leisure activities. In the case of incometaxation, where capital and labor income are taxed equally, theresulting effect on the growth rate is negative. The contributionof endogenous leisure is confined to reducing or increasing thesize of the effect on the growth rate. If only capital income istaxed, the direction of the effect may reverse. In that case, thepositive effect of the increase in total non-leisure timedominates the direct negative effect, implying that capitaltaxation increases the long-run growth rate.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-029/2.

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Date of creation: 02 Apr 2003
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Handle: RePEc:dgr:uvatin:20030029

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Keywords: Taxation; Endogenous growth; Endogenous labor supply.;

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  1. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
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  16. de Hek, Paul A., 1998. "An aggregative model of capital accumulation with leisure-dependent utility," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(2), pages 255-276, September.
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Citations

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Cited by:
  1. Xin Long & Alessandra Pelloni, 2012. "Welfare Improving Taxation on Savings in a Growth Model," CEIS Research Paper, Tor Vergata University, CEIS 218, Tor Vergata University, CEIS, revised 27 Jan 2012.
  2. Loretti I. Dobrescu & Mihaela Neamtu & Dumitru Opris, 2011. "Stability in a Three-Sector Dynamic Growth Model with Endogenous Labor Supply," Discussion Papers, School of Economics, The University of New South Wales 2012-10, School of Economics, The University of New South Wales.
  3. Scrimgeour, Dean, 2010. "Dynamic Scoring in a Romer-style Economy," Working Papers, Department of Economics, Colgate University 2010-02, Department of Economics, Colgate University.
  4. Gustavo Marrero, 2010. "Tax-mix, public spending composition and growth," Journal of Economics, Springer, Springer, vol. 99(1), pages 29-51, February.
  5. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(10), pages 3348-3369, October.
  6. 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, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 211-224, December.
  7. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, Elsevier, vol. 63(2), pages 77-90, June.

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