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Welfare Effects of Income Taxation in a Model of Stochastic Growth

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  • Clemens, Christiane
  • Soretz, Susanne

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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File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-210.pdf
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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-210.

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

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Keywords: endogenoues growth; taxation; uncertainty;

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References

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Citations

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Cited by:
  1. Soretz, Susanne, 2002. "Stochastic Pollution and Environmental Care in an Endogenous Growth Model," Hannover Economic Papers (HEP) dp-259, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Ingrid Ott & Susanne Soretz, 2004. "Growth and Welfare Effects of Tax Cuts: The Case of a Productive Public Input with Technological Risk," Empirica, Springer, vol. 31(2), pages 117-135, June.
  3. Ott, Ingrid & Soretz, Susanne, 2002. "Optimal Taxation in a Stochastic Endogenous Growth Model with Congestion," Hannover Economic Papers (HEP) dp-253, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Christiane Clemens, 2009. "Stochastic Growth and Factor Income Risk," German Economic Review, Verein für Socialpolitik, vol. 10, pages 422-447, November.
  5. Clemens, Christiane, 2004. "Growth and Labor Income Risk with Inelastic and Elastic Labor Supply," Hannover Economic Papers (HEP) dp-305, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  6. Clemens, Christiane, 1999. "Income Taxation, Government Expenditure, and Long-Run Stochastic Growth," Hannover Economic Papers (HEP) dp-220, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  7. Christiane Clemens, 2000. "The Impact Of Capital And Income Risk On Long-Run Growth," Computing in Economics and Finance 2000 212, Society for Computational Economics.
  8. Ingrid Ott & Susanne Soretz, 2002. "Fiscal Policy in a Stochastic Model of Endogenous Growth with Congestion," Computing in Economics and Finance 2002 162, Society for Computational Economics.
  9. Clemens, Christiane & Soretz, Susanne, 1999. "Konsequenzen des Zins- und Einkommensrisikos auf das wirtschaftliche Wachstum," Hannover Economic Papers (HEP) dp-221, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  10. Susanne Soretz, 2007. "Efficient Dynamic Pollution Taxation in an Uncertain Environment," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 36(1), pages 57-84, January.

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