Tax reform with useful public expenditures
This paper examines the economic effects of tax reform in an endogenous growth model that allows for two types of useful public expenditures; one type contributes to human capital information while the other provides direct utility to households. We show that the optimal fiscal policy calls for full expensing of private investment which shifts the tax base to private consumption. The efficient levels of public investment and public consumption relative to output are uniquely pinned down by parameters that govern both technology and preferences. In general, implementing the optimal fiscal policy requires a change in the size of government. If a tax reform holds the size of government fixed to satisfy a revenue-neutrality constraint, then the reform will be suboptimal; theory alone cannot tell us if welfare will be improved. For some calibrations of the model, we find that commonly-proposed versions of revenue-neutral tax reforms can result in large welfare gains. For other quite plausible calibrations, the exact same reform can result in tiny or even negative welfare gains as the revenue-neutrality constraint becomes more severely binding. Comparing across calibrations, we find that the welfare rankings of various reforms can change, depending on parameter values. Overall, our results highlight the uncertainty surrounding the potential welfare benefits of fundamental U.S. tax reform.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 7702, San Francisco, CA 94120-7702|
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-88, June.
- Charles T. Clotfelter & Ronald G. Ehrenberg & Malcolm Getz & John J. Siegfried, 1991. "Introduction to "Economic Challenges in Higher Education"," NBER Chapters, in: Economic Challenges in Higher Education, pages 1-16 National Bureau of Economic Research, Inc.
- Hercowitz, Zvi & Sampson, Michael, 1991.
"Output Growth, the Real Wage, and Employment Fluctuations,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1215-37, December.
- Hercovitz, Z. & Sampson, M., 1989. "Output Growth, The Real Wage, And Employment Fluctuations," RCER Working Papers 179, University of Rochester - Center for Economic Research (RCER).
- Steuerle, C Eugene, 1996. "How Should Government Allocate Subsidies for Human Capital?," American Economic Review, American Economic Association, vol. 86(2), pages 353-57, May.
- Gustavo Ventura, .
"Flat Tax Reform: A Quantitative Exploration,"
Computing in Economics and Finance 1997
172, Society for Computational Economics.
- 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).
- 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 S126-50, October.
- Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
- Davies, James B. & Zeng, Jinli & Zhang, Jie, 2000. "Consumption vs. income taxes when private human capital investments are imperfectly observable," Journal of Public Economics, Elsevier, vol. 77(1), pages 1-28, July.
- Robert J. Barro, 2012.
"Inflation and Economic Growth,"
CEMA Working Papers
568, China Economics and Management Academy, Central University of Finance and Economics.
- Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997.
"On the Optimal Taxation of Capital Income,"
Journal of Economic Theory,
Elsevier, vol. 73(1), pages 93-117, March.
- Poterba, James M, 1988. "Are Consumers Forward Looking? Evidence from Fiscal Experiments," American Economic Review, American Economic Association, vol. 78(2), pages 413-18, May.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Gerhard Glomm & B. Ravikumar, 1998. "Flat-Rate Taxes, Government Spending on Education, and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 306-325, January.
- Clotfelter, Charles T. & Ehrenberg, Ronald G. & Getz, Malcolm & Siegfried, John J., 1992.
"Economic Challenges in Higher Education,"
National Bureau of Economic Research Books,
University of Chicago Press,
edition 1, number 9780226110509.
- Steven P. Cassou & Kevin J. Lansing, 2004. "Growth Effects of Shifting from a Graduated-rate Tax System to a Flat Tax," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 194-213, April.
- 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.
- Kim, Se-Jik, 1998. "Growth effect of taxes in an endogenous growth model: to what extent do taxes affect economic growth?," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 125-158, September.
- Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
- Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February.
- Elizabeth M. Caucutt & Selahattin Imrohoroglu & Krishna B. Kumar, 2003. "Growth and Welfare Analysis of Tax Progressivity in a Heterogeneous-Agent Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 546-577, July.
- Lansing, Kevin J., 1999.
"Optimal redistributive capital taxation in a neoclassical growth model,"
Journal of Public Economics,
Elsevier, vol. 73(3), pages 423-453, September.
- Kevin J. Lansing, 1998. "Optimal redistributive capital taxation in a neoclassical growth model," Working Papers in Applied Economic Theory 99-01, Federal Reserve Bank of San Francisco.
- Watanabe, Katsunori & Watanabe, Takayuki & Watanabe, Tsutomu, 2001. "Tax policy and consumer spending: evidence from Japanese fiscal experiments," Journal of International Economics, Elsevier, vol. 53(2), pages 261-281, April.
- Heckman, James J, 1976. "A Life-Cycle Model of Earnings, Learning, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S11-44, August.
- Kim, Jinill, 2003. "Functional equivalence between intertemporal and multisectoral investment adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 533-549, February.
- Robert A. Amano & Tony Wirjanto, 1997.
"Government Expenditures and the Permanent-Income Model,"
98002, University of Waterloo, Department of Economics, revised Nov 1997.
- Robert A. Amano & Tony S. Wirjanto, 1998. "Government Expenditures and the Permanent-Income Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 719-730, July.
- Philip R. Gerson, 1998. "The Impact of Fiscal Policy Variables on Output Growth," IMF Working Papers 98/1, International Monetary Fund.
- Ortigueira, Salvador, 1998.
"Fiscal policy in an endogenous growth model with human capital accumulation,"
Journal of Monetary Economics,
Elsevier, vol. 42(2), pages 323-355, July.
- Salvador Ortigueira, 1996. "Fiscal Policy in an Endogenous Growth Model with Human Capital Accumulation," Working Papers 9609, Centro de Investigacion Economica, ITAM.
- Gruner, Hans Peter & Heer, Burkhard, 2000. "Optimal Flat-Rate Taxes on Capital--A Re-examination of Lucas' Supply Side Model," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 289-305, April.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fedfap:98-09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)
If references are entirely missing, you can add them using this form.