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Optimal Taxation and Public Expenditure in a Model of Endogenous Growth

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  • Doménech Rafael

    (Universidad de Valencia)

  • García Jose Ramón

    (Universitat de Valencia)

Abstract

This paper analyses the optimal choice of fiscal policy in a model where public spending enters the production and utility functions and can be financed using flat rate taxes on consumption and on capital and labor incomes. Within this framework we generalize some previous results in the literature. Our results show that the optimal tax structure involves positive values of all the tax rates, which depend on structural parameters and how the returns to public capital are appropriated by private factors. We also conclude that the correct allocation of public spending is more important for welfare than the choice of the tax structure.

Suggested Citation

  • Doménech Rafael & García Jose Ramón, 2002. "Optimal Taxation and Public Expenditure in a Model of Endogenous Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-26, June.
    • Handle: RePEc:bpj:bejmac:v:topics.2:y:2002:i:1:n:3
    DOI: 10.2202/1534-5998.1040
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    References listed on IDEAS

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    1. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
    2. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
    3. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    4. Nouriel Roubini & Gian Maria Milesi-Ferrett, 1994. "Optimal Taxation of Human and Physical Capital in Endogenous Capital Models," NBER Working Papers 4882, National Bureau of Economic Research, Inc.
    5. Devereux, Michael B & Love, David R F, 1995. "The Dynamic Effects of Government Spending Policies in a Two-Sector Endogenous Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 232-256, February.
    6. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
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    Cited by:

    1. António Afonso & Juan Alegre, 2011. "Economic growth and budgetary components: a panel assessment for the EU," Empirical Economics, Springer, vol. 41(3), pages 703-723, December.
    2. Miguel Viegas & Ana Ribeiro, 2014. "The Economic Adjustment Program for Portugal: assessing welfare impact in a heterogeneous-agent framework," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(1), pages 53-70, April.
    3. Dissou, Yazid & Didic, Selma & Yakautsava, Tatsiana, 2016. "Government spending on education, human capital accumulation, and growth," Economic Modelling, Elsevier, vol. 58(C), pages 9-21.
    4. Yazid Dissou & Selma Didic, 2012. "Government spending on education, human capital accumulation, taxes and growth: a multisector dynamic general equilibrium analysis," EcoMod2012 4540, EcoMod.

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