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Welfare Effects of Income Taxation in a Model of Stochastic Growth

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Author Info
Clemens, Christiane
Soretz, Susanne

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Abstract

This paper analyzes growth and welfare effects of income taxation in a stochastic endogenous growth model with externalities in human-capital accumulation. The government participates in individual income risks by the collection of a flat-rate income tax that affects the mean and the variance of after-tax income. We examine the implications of a tax-transfer policy for the macroeconomic equilibrium of the economy. An increase in the tax rate on mean income has an unambiguously negative effect on the expected growth rate. Paradoxically, this may induce welfare gains. The opposite results can be derived for a rise in the tax rate on transitory income. These counter-intuitive results of the stochastic Arrow-Romer model can be ascribed to the specific int eraction of consumption and portfolio choice in the determination of growth and welfare.

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Publisher Info
Paper provided by Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover with number dp-210.

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Length: 22 pages
Date of creation: Oct 1997
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Handle: RePEc:han:dpaper:dp-210

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Related research
Keywords: endogenoues growth; taxation; uncertainty;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D9 - Microeconomics - - Intertemporal Choice and Growth
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
G1 - Financial Economics - - General Financial Markets
H2 - Public Economics - - Taxation, Subsidies, and Revenue
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

References listed on IDEAS
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