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Tax policy and human capital formation with public investment in education

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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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Bibliographic 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
Date of revision:
Handle: RePEc:eth:wpswif:05-41

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

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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.
  2. Buiter, Willem H & Kletzer, Kenneth, 1995. "Capital Mobility, Fiscal Policy and Growth Under Self-Financing of Human Capital Formation," CEPR Discussion Papers 1179, C.E.P.R. Discussion Papers.
  3. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, April.
  4. Bovenberg, A. Lans & van Ewijk, Casper, 1997. "Progressive taxes, equity, and human capital accumulation in an endogenous growth model with overlapping generations," Journal of Public Economics, Elsevier, vol. 64(2), pages 153-179, May.
  5. 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 818-34, August.
  6. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  7. Eckstein, Z. & Zilcha, I., 1991. "The Effects of Compulsury Schooling on Growth Income Distribution and Welfare," Papers 38-91, Tel Aviv.
  8. Heijdra, Ben J & Ligthart, Jenny E, 2000. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," Oxford Economic Papers, Oxford University Press, vol. 52(4), pages 677-701, October.
  9. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  10. Jose De Gregorio & Se-Jik Kim, 1994. "Credit Markets with Differences in Abilities," IMF Working Papers 94/47, International Monetary Fund.
  11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  12. Meijdam, A.C., 1998. "Taxes, Growth and Welfare in an Endogenous Growth Model with Overlapping Generations," Discussion Paper 1998-133, Tilburg University, Center for Economic Research.
  13. Docquier, Frederic & Michel, Philippe, 1999. " Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 425-40, September.
  14. Yakita, Akira, 2003. "Taxation and growth with overlapping generations," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 467-487, March.
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Cited by:
  1. Valente, Simone, 2011. "Intergenerational externalities, sustainability and welfare—The ambiguous effect of optimal policies on resource depletion," Resource and Energy Economics, Elsevier, vol. 33(4), pages 995-1014.
  2. Simone Valente, 2007. "Human Capital, Resource Constraints and Intergenerational Fairness," CER-ETH Economics working paper series 07/68, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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