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Expenditure Composition and Distortionary Tax for Equitable Economic Growth

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  • Hyun Park
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    Abstract

    This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal longrun growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two conclusions suggest that the interaction between fiscal policy and growth may be complicated enough that it cannot be captured in a simple linear model using an aggregate measure of fiscal policy. The sources of nonlinearity include expectation and coordination of fiscal policy, impluse response of government policies, and the presence of positive externality due to government spending.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/165.

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    Length: 40
    Date of creation: 01 Jun 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/165

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    Keywords: Economic growth; Government expenditures; Production; Taxes; fiscal policy; government spending; expenditure; tax rates; government expenditure; expenditures; taxation; tax revenue; tax revenues; budget constraint; fiscal policies; tax policy; public expenditure; redistributive government spending; government budget; government budget constraint; public spending; expenditure composition; public expenditures; expenditure programs; composition of government expenditure; expenditure policy; fiscal affairs department; fiscal adjustment; fiscal variable; fiscal policy instruments; fiscal affairs; budget constraints; fiscal expansion; categories of expenditures; tax base; tax system; tax income; public debt; public finance; expenditure increases; social security spending; composition of expenditures; government revenue; fiscal adjustments; fiscal instrument; fiscal policy instrument; tax bases; total expenditure;

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    Cited by:
    1. Groneck, Max, 2008. "A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-7, University of Cologne, FiFo Institute for Public Economics.
    2. Groneck, Max, 2010. "A golden rule of public finance or a fixed deficit regime?: Growth and welfare effects of budget rules," Economic Modelling, Elsevier, vol. 27(2), pages 523-534, March.

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