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Growth, Employment and Taxation with Distortions in the Goods and Labour Market


  • Werner Roeger


This paper analyses taxation in the presence of distortions in goods and labour markets in an endogenous growth model. The government disposes of capital, labour and consumption taxes. It is shown that the market solution leads to suboptimally low levels of growth and employment. However, available tax instruments are sufficient to attain the first-best growth path in this economy. The paper further explores the relative distortion of capital and labour taxes. For plausible parametrisations of the model, lowering capital taxes dominate reductions in labour taxes in welfare terms. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2007.

Suggested Citation

  • Werner Roeger, 2007. "Growth, Employment and Taxation with Distortions in the Goods and Labour Market," German Economic Review, Verein für Socialpolitik, vol. 8, pages 1-27, February.
  • Handle: RePEc:bla:germec:v:8:y:2007:i::p:1-27

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    References listed on IDEAS

    1. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, March.
    2. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
    3. Dieter Balkenborg, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 731-738, June.
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