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Experimentos de Política Fiscal por el Lado de la Oferta en un Modelo Monetario de Crecimiento Endógeno

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In an endogenous growth model with human capital acumulation,I discuss the feasibility of a reduction in a marginal tax rate on labor and capital income, given a predeterminated path for government expenditures. A permanent tax cut is feasible if it can be compensated by an increase in the tax base due to a dynamic Laffer curve effect. This means that a same sequence of expenditures can be financed allowing the government to balance its budget in the long-run. I show that the largest feasible reduction in labor income tax rates produce a higher welfare gain than the largest feasib le reduction in capital income tax rates. However, reductions incapital income taxes can be preferred by governments who care more about the level of deficits and debt than about consumers’ welfare. Finally, I analyze the effect on welfare if reductions in tax rates when the government can finance its expenditure through taxes on capital and labor income or by issuing money and debt. I also discuss whether issuing debt or issuing money is preferred by the government in order to finance the deficit led by tax rates cuts.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0211.

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Length: pages 35
Date of creation: 2002
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Handle: RePEc:ucm:doicae:0211

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