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On taxation in a two-sector endogenous growth model with endogenous labor supply

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  • de Hek, Paul A.

Abstract

This paper examines the effects of taxation on long-run growthin a two-sector endogenous growth model with (i) physical capitalas an input in the education sector and (ii) leisure as anadditional argument in the utility function. The analysis of theeffects of taxation - including income taxation, capital incometaxation and labor income taxation - distinguishes between thecase with a unique (interior) balanced growth path and the casewith multiple balanced growth paths. Due to the flexibility oflabor supply, taxation of income may induce agents to spend moreor less time on leisure activities. In the case of incometaxation, where capital and labor income are taxed equally, theresulting effect on the growth rate is negative. The contributionof endogenous leisure is confined to reducing or increasing thesize of the effect on the growth rate. If only capital income istaxed, the direction of the effect may reverse. In that case, thepositive effect of the increase in total non-leisure timedominates the direct negative effect, implying that capitaltaxation increases the long-run growth rate.
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  • de Hek, Paul A., 2006. "On taxation in a two-sector endogenous growth model with endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 655-685, April.
  • Handle: RePEc:eee:dyncon:v:30:y:2006:i:4:p:655-685
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    Cited by:

    1. Tenryu, Yohei, 2017. "Capital Income Tax, Linear R&D Technology, and Economic Growth," MPRA Paper 78706, University Library of Munich, Germany.
    2. repec:eee:pubeco:v:154:y:2017:i:c:p:137-159 is not listed on IDEAS
    3. Wei-Bin Zhang, 2014. "Endogenous population with human and physical capital accumulation," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(3), pages 231-252, September.
    4. Andrew Hodge, 2016. "The Design of Fiscal Reform Packages; Insights from a Theoretical Endogenous Growth Model," IMF Working Papers 16/146, International Monetary Fund.
    5. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    6. Wei-Bin Zhang, 2016. "Impact of Education Subsidies and Taxation on Wealth and Human Capital Accumulation," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 2(3), pages 222-247.
    7. repec:hur:ijarbs:v:7:y:2017:i:11:p:643-666 is not listed on IDEAS
    8. Marattin, Luigi & Marzo, Massimiliano & Zagaglia, Paolo, 2013. "Distortionary tax instruments and implementable monetary policy," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 219-243.
    9. Simón Sosvilla-Rivero & Marta Gómez-Puig, 2016. "“Debt-growth linkages in EMU across countries and time horizons”," IREA Working Papers 201610, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.
    10. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, vol. 63(2), pages 77-90, June.
    11. Loretti Dobrescu & Mihaela Neamtu & Dumitru Opris, 2013. "Deterministic and Stochastic Three-Sector Dynamic Growth Model with Endogenous Labour Supply," The Economic Record, The Economic Society of Australia, vol. 89(284), pages 99-111, March.
    12. Wei-Bin ZHANG, 2014. "Gender Discrimination, Education and Economic Growth in a Generalized Uzawa-Lucas Two-Sector Model," Timisoara Journal of Economics and Business, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 7(1), pages 1-34.
    13. Chetan Ghate, 2007. "Voting, Wealth Heterogeneity, and Endogenous Labor Supply," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(4), pages 477-497, December.
    14. Bidisha Chakraborty & Manash Ranjan Gupta, 2006. "A Note on the Inclusion of Human Capital in the Lucas Model," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 211-224, December.
    15. Dean Scrimgeour, 2015. "Dynamic Scoring in a Romer-Style Economy," Southern Economic Journal, Southern Economic Association, vol. 81(3), pages 697-723, January.
    16. Wei-Bin, ZHANG, 2015. "Economic Oscillations With Endogenous Population, Human Capital And Wealth," Annals of Spiru Haret University, Economic Series, Universitatea Spiru Haret, vol. 6(2), pages 9-26.
    17. Loretti I. Dobrescu & Mihaela Neamtu & Dumitru Opris, 2011. "Stability in a Three-Sector Dynamic Growth Model with Endogenous Labor Supply," Discussion Papers 2012-10, School of Economics, The University of New South Wales.
    18. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.
    19. Chung-Fu Lai & Yin-Rong Chang, 2016. "Effects of Imputation Ratio Change on Open Economy in the Integrated Income Tax System," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(1), pages 1-14, January.
    20. Marrero, Gustavo A. & Novales, Alfonso, 2007. "Income taxes, public investment and welfare in a growing economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3348-3369, October.
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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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