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Taxing or subsidizing Factors' rents in a simple endogenous growth model with public capital

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Author Info
Gustavo A. Marrero () (Departamento de Economía Cuantitativa and ICAE, Universidad Complutense, Somosaguas, 28223 Madrid, Spain.)
Alfonso Novales () (Departamento de Economía Cuantitativa and ICAE, Universidad Complutense, Somosaguas, 28223 Madrid, Spain.)

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Abstract

This paper tackles the fundamental issue in public finance of wether taxing or subsidizing factor rents. In a one sector endogenous growth model with private and public capital, similar to that in Barro (1990),we find that raising taxes on factors’ income as part of an optimal fiscal policy is a more pervasive result than it seems. The interaction of technological and fiscal externalities is central for this result. For instance, high enough levels of wasteful expenditures to output ratio could make positive income taxes enhance welfare. This ratio would need to be smaller, the lower the spillover externality and/or the larger the elasticities of private and public capital in the private production function.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0303.

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Date of creation: 2003
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Handle: RePEc:ucm:doicae:0303

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