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Tax Incidence in Dynamic Economies with Externalities and Endogenous Labor Supply


  • Amano, Daisuke
  • Itaya, Jun-ichi
  • Mino, Kazuo


This paper examines the long-run incidence of factor income taxes and expenditure taxes in an infinitely lived representative agent growth model which allows both for production externalities and for endogenous labor supply. The novelty of this paper is its investigating of how the long-run incidence of taxes is affected by indeterminacy of equilibria that is caused mainly by nonseparable preferences between consumption and leisure. We show that the effects of the taxes on steady state welfare as well as the steady state levels of consumption, capital, and employment are all negative regardless of whether a steady state is determinate or indeterminate in an exogenous growth model. By contrast, in an endogenous growth model those distortionary taxes are growth and welfare enhancing in both a determinate steady state featuring the unconventional slope of the labor supply curve and an indeterminate steady state featuring its conventional slope. (JEL classifications: H41, F13, D62)

Suggested Citation

  • Amano, Daisuke & Itaya, Jun-ichi & Mino, Kazuo, 2007. "Tax Incidence in Dynamic Economies with Externalities and Endogenous Labor Supply," Discussion paper series. A 192, Graduate School of Economics and Business Administration, Hokkaido University.
  • Handle: RePEc:hok:dpaper:192

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    References listed on IDEAS

    1. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
    2. Peralta, Susana & van Ypersele, Tanguy, 2005. "Factor endowments and welfare levels in an asymmetric tax competition game," Journal of Urban Economics, Elsevier, vol. 57(2), pages 258-274, March.
    3. Wildasin, David E., 1989. "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," Journal of Urban Economics, Elsevier, vol. 25(2), pages 193-212, March.
    4. Itaya, Jun-ichi & Okamura, Makoto & Yamaguchi, Chikara, 2006. "Asymmetric Tax Competition in a Repeated Game Setting," Discussion paper series. A 176, Graduate School of Economics and Business Administration, Hokkaido University.
    5. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    6. Haufler, Andreas, 1997. " Factor Taxation, Income Distribution and Capital Market Integration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 425-446, September.
    7. Cardarelli, Roberto & Taugourdeau, Emmanuelle & Vidal, Jean-Pierre, 2002. " A Repeated Interactions Model of Tax Competition," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(1), pages 19-38.
    8. Coates, Dennis, 1993. "Property tax competition in a repeated game," Regional Science and Urban Economics, Elsevier, vol. 23(1), pages 111-119, March.
    9. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
    10. Marco CATENARO & Jean-Pierre VIDAL, 2006. "Implicit tax co-ordination under repeated policy interactions," Discussion Papers (REL - Recherches Economiques de Louvain) 2006011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    11. Marco Cotenaro & Jean-Pierre Vidal, 2006. "Implicit tax co-ordination under repeated policy interactions," Recherches économiques de Louvain, De Boeck Université, vol. 72(1), pages 5-18.
    12. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
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    Cited by:

    1. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    2. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, vol. 154(C), pages 137-159.
    3. Daisuke Amano & Jun-ichi Itaya & Kazuo Mino, 2014. "Trade Structure and Growth Effects of Taxation in a Two-Country World," CESifo Working Paper Series 4882, CESifo Group Munich.

    More about this item


    Tax incidence; externalities; indeterminacy and endogenous labor supply; H41; F13; D62;

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D62 - Microeconomics - - Welfare Economics - - - Externalities


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