In this paper, a modification is made to the endogenous growth model studied by Lucas [1988]. It is shown that if individuals derive utility from their level of human capital, then a tax on the return to physical capital can raise the equilibrium growth rate. Consumption taxation may increase the growth rate. If there is an externality in production of human capital, then it may be optimal to impose a capital tax, as opposed to a subsidy, to achieve the optimal growth rate. This may be a reason why existing estimates of the welfare costs of capital taxation may be overstated.
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Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number
0123.
Find related papers by JEL classification: E1 - Macroeconomics and Monetary Economics - - General Aggregative Models E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook J2 - Labor and Demographic Economics - - Demand and Supply of Labor O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
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