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Optimal Government Spending and Taxation in Endgenous Growth Models

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  • Giancarlo Corsetti
  • Nouriel Roubini

Abstract

This paper analyzes optimal spending, tax and financial policies in models of endogenous growth where public spending is productive. We extend previous work in four directions. First, we analyze optimal policies when the government is allowed to borrow and lend, rather than being restricted to run a balanced budget in every period. Second, we develop a model with a separate human capital accumulation sector. Therefore, the properties of optimal policies depend on whether government spending affects the productivity of the final goods sector or the human capital accumulation sector. Third, we consider the policy implications of alternative assumptions about which factor of production benefits from the external effects of productive public goods. Fourth, we study the implications of restrictions on the menu of tax instruments available to the policy maker. We contrast optimal tax rates on human and physical capital under different assumptions on technology and distribution. We analyze the welfare properties of public debt and assets.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5851.

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Date of creation: Dec 1996
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Handle: RePEc:nbr:nberwo:5851

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  1. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  2. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycles," UWO Department of Economics Working Papers 9104, University of Western Ontario, Department of Economics.
  3. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
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  10. Gian Maria Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," Working Papers 95-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  11. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  12. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "Growth Effects of Income and Consumption Taxes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 721-44, November.
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  17. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
  18. Nouriel Roubini & Gian Maria Milesi-Ferrett, 1994. "Optimal Taxation of Human and Physical Capital in Endogenous Capital Models," NBER Working Papers 4882, National Bureau of Economic Research, Inc.
  19. 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.
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Citations

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Cited by:
  1. Pablo Serra & Daniel Hojman, 2000. "A Note on the Optimality of the Cash Flow Tax," Documentos de Trabajo 83, Centro de Economía Aplicada, Universidad de Chile.
  2. Marrero, Gustavo A. & Novales, Alfonso, 2005. "Growth and welfare: Distorting versus non-distorting taxes," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 403-433, September.
  3. António Afonso & Juan Alegre, 2011. "Economic growth and budgetary components: a panel assessment for the EU," Empirical Economics, Springer, vol. 41(3), pages 703-723, December.
  4. José E. Boscá & José R. García & David Tagüas, 2005. "Effective Tax rates and Fiscal Convergence in the OECD: 1965-2001," Hacienda Pública Española, IEF, vol. 174(3), pages 119-141, September.
  5. Bosi, Stefano & Laurent, Thierry, 2011. "Health, growth and welfare: a theoritical appraisal of the long run impact of medical R&D," MPRA Paper 33789, University Library of Munich, Germany.
  6. Gustavo A. Marrero & Alfonso Novales, 2003. "Taxing or subsidizing Factors' rents in a simple endogenous growth model with public capital," Documentos del Instituto Complutense de Análisis Económico 0303, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  7. Susana Martins & Francisco José Veiga, 2013. "Government size, composition of public expenditure, and economic development," NIPE Working Papers 17/2013, NIPE - Universidade do Minho.
  8. Greiner, Alfred, 2008. "Fiscal policy in an endogenous growth model with human capital and heterogenous agents," Economic Modelling, Elsevier, vol. 25(4), pages 643-657, July.
  9. Pelloni, Alessandra & Waldmann, Robert, 2000. "Can waste improve welfare?," Journal of Public Economics, Elsevier, vol. 77(1), pages 45-79, July.
  10. Jan-Ting Guo & Kevin J. Lansing, 1997. "Tax structure and welfare in a model of optimal fiscal policy," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 11-23.
  11. Semmler, Willi & Greiner, Alfred & Diallo, Bobo & Rezai, Armon & Rajaram, Anand, 2007. "Fiscal policy, public expenditure composition, and growth theory and empirics," Policy Research Working Paper Series 4405, The World Bank.
  12. Calomiris, Charles W. & Hassett, Kevin A., 2002. "Marginal Tax Rate Cuts and the Public Tax Debate," National Tax Journal, National Tax Association, vol. 55(N. 1), pages 119-131, March.
  13. Alfred Greiner & Peter Flaschel, 2009. "Economic Policy in a Growth Model with Human Capital, Heterogenous Agents and Unemployment," Computational Economics, Society for Computational Economics, vol. 33(2), pages 175-192, March.
  14. Cassou, Steven P. & Lansing, Kevin J., 1998. "Optimal fiscal policy, public capital, and the productivity slowdown," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 911-935, June.
  15. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3348-3369, October.

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