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Income Taxation, Government Expenditure, and Long-Run Stochastic Growth

  • Clemens, Christiane

This paper employs a stochastic endogenous growth model with productive government expenditure to analyze the macroeconomic effects of income taxation. We demonstrate that in the presence of capital and income risk the impact of taxation on consumption choice as well as on economic growth is ambiguous as it affects the mean as well as the variance of disposable income. We observe that the effects of taxation crucially depend on the degree of risk aversion and on the capital income share. Nevertheless, it is possible to solve for welfare maximizing policies. Compared to the deterministic setting, for the optimal policy design additional conditions have to be met.

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Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-220.

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Length: 17 pages
Date of creation: Mar 1999
Date of revision:
Handle: RePEc:han:dpaper:dp-220
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  1. Stephen Turnovsky, 1998. "Productive Government Expenditure in a Stochastically Growing Economy," Working Papers 0056, University of Washington, Department of Economics.
  2. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April.
  3. Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
  4. Smith, R Todd, 1996. "Cyclical Uncertainty, Precautionary Saving and Economic Growth," Economica, London School of Economics and Political Science, vol. 63(251), pages 477-94, August.
  5. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
  6. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  7. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
  8. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  9. Xu, Xiaonian, 1995. "Precautionary Savings under Liquidity Constraints: A Decomposition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 675-90, August.
  10. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  11. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
  12. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  13. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Stiglitz, Joseph E, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 263-83, May.
  15. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
  16. Cazzavillan, Guido, 1996. "Public Spending, Endogenous Growth, and Endogenous Fluctuations," Journal of Economic Theory, Elsevier, vol. 71(2), pages 394-415, November.
  17. Clemens, Christiane & Soretz, Susanne, 1997. "Welfare Effects of Income Taxation in a Model of Stochastic Growth," Hannover Economic Papers (HEP) dp-210, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  18. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  19. Weil, Philippe, 1993. "Precautionary Savings and the Permanent Income Hypothesis," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 367-83, April.
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