In this paper, we shed light on the relationship between taxation and steady states by analyzing the OGL model of Chakraborty [2004]. We show that there is (i) a non-monotonic relationship between taxation and growth; (ii) a threshold value of taxation in such a way that there is no effect on the steady state; and finally, (iii) the effect on the two nontrivial steady states is not equal: an increase in tax rate will initially reduce (increase) the unstable (stable) steady state and will then increase (reduce) it.
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number
105.
Find related papers by JEL classification: H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health I12 - Health, Education, and Welfare - - Health - - - Health Production O1 - Economic Development, Technological Change, and Growth - - Economic Development O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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