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Taxation of Labor and Capital Income in an OLG Model with Home Production and Endogenous Fertility

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Author Info
Burkhard Heer () (Seminar fuer Staatswissenschaften, Universitaet zu Koeln, Albertus-Magnus-Platz, 50923 Koeln, Germany)
Mark Trede () (Seminar fuer Wirtschafts- und Sozialstatistik, Universitaet zu Koeln, Albertus-Magnus-Platz, 50923 Koeln, Germany)

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Abstract

Many developing countries are characterized by a large share of home production. Households allocate their time on both market and non-market activities. The introduction of a tax on labor or capital income induces people to divert from market production to home production. Furthermore, children are often used as an input into home production. In this situationm a higher tax rate on capital income causes not only a decrease in the capital intensity but also an increase in the population growth rate. The effects of a wage tax on economic development are shown to depend on the opportunity costs of raising children. For reasonable parameter values of the tax rate, labor income taxation will reduce capital accumulation and cause a rise in home production. As a result fiscal policy should be combined with population policies.

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Paper provided by Universitaet zu Koeln in its series Statistics and Econometrics with number 9/95.

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Length: 14 pages
Date of creation: 1995
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Handle: RePEc:wop:koelse:9509

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Keywords: Overlapping Generations Income Taxation Population Growth Home Production

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycle," RCER Working Papers 268, University of Rochester - Center for Economic Research (RCER).
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  3. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December. [Downloadable!] (restricted)
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  4. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  6. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  7. Drazen, Allan & Eckstein, Zvi, 1988. "On the Organization of Rural Markets and the Process of Economic Development," American Economic Review, American Economic Association, vol. 78(3), pages 431-43, June. [Downloadable!] (restricted)
  8. Barro, Robert J & Becker, Gary S, 1989. "Fertility Choice in a Model of Economic Growth," Econometrica, Econometric Society, vol. 57(2), pages 481-501, March. [Downloadable!] (restricted)
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  9. Robert E. Lucas, Jr., 1989. "On the Mechanics of Economic Development," NBER Reprints 1176, National Bureau of Economic Research, Inc.
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  10. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1042-67, December. [Downloadable!] (restricted)
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