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Tax policy and human capital formation with public investment in education

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Author Info
Simone Valente () (Institute of Economic Research (WIF), Swiss Federal Institute of Technology Zurich (ETH))

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Abstract

This paper studies the e¤ects of distortionary taxes and public in- vestment in an endogenous growth OLG model with knowledge trans- mission. Fiscal policy a¤ects growth in two respects: .rst, work time reacts to variations of prospective tax rates and modi.es knowledge formation; second, public spending enhances labour e¢ ciency but also stimulates physical capital through increased savings. It is shown that Ramsey-optimal policies reduce savings due to high tax rates on young generations, and are not necessarily growth-improving with respect to a pure private system. Non-Ramsey policies that shift the burden on adults are always growth-improving due to crowding-in e¤ects: the welfare of all generations is unambiguously higher with respect to a private system, and there generally exists a continuum of non-optimal tax rates under which long-run growth and welfare are higher than with the Ramsey-optimal policy.

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Publisher Info
Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 05/41.

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Length: 29 pages
Date of creation: Jun 2005
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Handle: RePEc:eth:wpswif:05-41

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Related research
Keywords: Endogenous growth; Human capital; Overlapping generations; Tax policy; Public investment.;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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  1. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October. [Downloadable!] (restricted)
  2. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  3. Yakita, Akira, 2003. "Taxation and growth with overlapping generations," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 467-487, March. [Downloadable!] (restricted)
  4. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 813-34, August.
  5. Zvi Eckstein & Itzhak Zilcha, 1991. "The Effects of Compulsory Schooling on Growth, Income Distribution and Welfare," Boston University - Institute for Economic Development 20, Boston University, Institute for Economic Development.
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  6. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February. [Downloadable!] (restricted)
  7. Se-Jik Kim & Jose De Gregorio, 1994. "Credit Markets with Differences in Abilities - Education, Distribution, and Growth," IMF Working Papers 94/47, International Monetary Fund.
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  8. Meijdam, L., 1998. "Taxes, growth and welfare in an endogenous growth model with overlapping generations," Discussion Paper 133, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Johanna Elisabeth Ligthart & Ben J. Heijdra, 1998. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," IMF Working Papers 98/182, International Monetary Fund.
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  10. Docquier, Frederic & Michel, Philippe, 1999. " Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(3), pages 425-40, September. [Downloadable!] (restricted)
  11. 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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