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Optimal Taxation and Growth with Public Goods and Costly Enforcement

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  • Pierre-Richard Agénor
  • Kyriakos C. Neanidis

Abstract

This paper studies optimal direct and indirect taxation in an endogenous growth framework with a productive public good and costly tax collection. Optimal (growth-maximizing) tax rules are derived under exogenous collection costs. The optimal direct-indirect tax ratio is shown to be negatively related to the administrative costs of collecting these taxes, as documented in cross-country data. This result also holds under endogenous collection costs (with these costs inversely related to administrative spending on tax enforcement), but for these to generate significant effects on tax collection requires implausibly high degrees of efficiency in spending, or the allocation of a large fraction of resources to tax enforcement. Depending on how it is financed, the latter policy may entail adverse effects on growth. Improving "tax culture" and the sense of civic duty through greater budgetary transparency may be a more effective policy to improve tax collection and promote economic growth.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr89.pdf
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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 89.

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Length: 41 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:man:cgbcrp:89

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