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On the taxation of human and physical capital in models of endogenous growth

  • Milesi-Ferretti, Gian Maria
  • Roubini, Nouriel

This paper studies the effects of factor income taxation and of subsidies to human capital accumulation in models of endogenous growth. It examines in particular how these effects depend on the specification of the leisure activity and on the technology and tax treatment of the sector producing human capital. It shows that the negative effects of factor income taxes on economic growth are stronger when the human capital sector is a market good. Under these circumstances, a subsidy to human capital accumulation can offset the direct growth effects of labour taxation, making it akin to a consumption tax. The paper then derives the normative implications of the analysis for the optimal taxation of factor incomes, showing that all tax and subsidy ‘wedges’ should be eliminated in the long run.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 70 (1998)
Issue (Month): 2 (November)
Pages: 237-254

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Handle: RePEc:eee:pubeco:v:70:y:1998:i:2:p:237-254
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  2. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  3. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  4. Asea, Patrick & Mendoza, Enrique G & Milesi-Ferretti, Gian Maria, 1996. "On the Ineffectiveness of Tax Policy in Altering Long- Run Growth: Harberger's Superneutrality Conjecture," CEPR Discussion Papers 1378, C.E.P.R. Discussion Papers.
  5. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June.
  6. Antonio Ladron de Guevara & Salvador Ortigueira & Manuel Santos, 1995. "A Two-Sector Model of Endogenous Growth with Leisure," Working Papers 9503, Centro de Investigacion Economica, ITAM.
  7. 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.
  8. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
  9. Casey B. Mulligan & Xavier Sala-i-Martin, 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," NBER Working Papers 3986, National Bureau of Economic Research, Inc.
  10. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  11. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  12. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  13. 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.
  14. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
  15. Stern, Nicholas, 1992. "From the static to the dynamic: some problems in the theory of taxation," Journal of Public Economics, Elsevier, vol. 47(2), pages 273-297, March.
  16. King, R.G. & Rebelo, S., 1988. "Public Policy And Economic Growth: Developing Neoclassical Implications," RCER Working Papers 225, University of Rochester - Center for Economic Research (RCER).
  17. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycles," UWO Department of Economics Working Papers 9104, University of Western Ontario, Department of Economics.
  18. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
  19. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  20. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  21. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "Growth Effects of Income and Consumption Taxes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 721-44, November.
  22. Pecorino, Paul, 1993. "Tax structure and growth in a model with human capital," Journal of Public Economics, Elsevier, vol. 52(2), pages 251-271, September.
  23. Nicholas Bull, 1993. "When all the optimal dynamic taxes are zero," Working Paper Series / Economic Activity Section 137, Board of Governors of the Federal Reserve System (U.S.).
  24. 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.
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