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Income Taxation, Government Expenditure, and Long-Run Stochastic Growth

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Author Info
Clemens, Christiane

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Abstract

This paper employs a stochastic endogenous growth model with productive government expenditure to analyze the macroeconomic effects of income taxation. We demonstrate that in the presence of capital and income risk the impact of taxation on consumption choice as well as on economic growth is ambiguous as it affects the mean as well as the variance of disposable income. We observe that the effects of taxation crucially depend on the degree of risk aversion and on the capital income share. Nevertheless, it is possible to solve for welfare maximizing policies. Compared to the deterministic setting, for the optimal policy design additional conditions have to be met.

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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-220.

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Length: 17 pages
Date of creation: Mar 1999
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Handle: RePEc:han:dpaper:dp-220

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Related research
Keywords: Endogenous Growth; Taxation; Uncertainty;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D9 - Microeconomics - - Intertemporal Choice and Growth
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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  3. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November. [Downloadable!] (restricted)
  4. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Smith, R Todd, 1996. "Cyclical Uncertainty, Precautionary Saving and Economic Growth," Economica, London School of Economics and Political Science, vol. 63(251), pages 477-94, August. [Downloadable!] (restricted)
  6. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November. [Downloadable!] (restricted)
  7. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Blackwell Publishing, vol. 37(3), pages 353-60, July. [Downloadable!] (restricted)
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  9. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation, Yale University. [Downloadable!]
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  10. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  11. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March. [Downloadable!] (restricted)
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  12. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  13. Weil, Philippe, 1993. "Precautionary Savings and the Permanent Income Hypothesis," Review of Economic Studies, Blackwell Publishing, vol. 60(2), pages 367-83, April. [Downloadable!] (restricted)
  14. Xu, Xiaonian, 1995. "Precautionary Savings under Liquidity Constraints: A Decomposition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 675-90, August. [Downloadable!] (restricted)
  15. Stephen Turnovsky, 1998. "Productive Government Expenditure in a Stochastically Growing Economy," Discussion Papers in Economics at the University of Washington 0056, Department of Economics at the University of Washington. [Downloadable!]
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  16. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August. [Downloadable!] (restricted)
  17. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April. [Downloadable!] (restricted)
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  18. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April. [Downloadable!] (restricted)
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