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Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis

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  • Mr. Gian M Milesi-Ferretti
  • Nouriel Roubini

Abstract

The effects of income and consumption taxation are examined in the context of models in which the growth process is driven by the accumulation of human and physical capital. The different channels through which these taxes affect economic growth are discussed, and it is shown that in general the taxation of factor incomes (human and physical capital) is growth-reducing. The effects of consumption taxation on growth depend crucially on the elasticity of labor supply, and therefore on the specification of the leisure activity. The paper also derives some implications for the optimal intertemporal choice of tax instruments.

Suggested Citation

  • Mr. Gian M Milesi-Ferretti & Nouriel Roubini, 1995. "Growth Effects of Income and Consumption Taxes: Positive and Normative Analysis," IMF Working Papers 1995/062, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1995/062
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    2. Frank Hettich, 1998. "Growth effects of a revenue-neutral environmental tax reform," Journal of Economics, Springer, vol. 67(3), pages 287-316, October.
    3. Emmanuel Atta Anaman & Samuel Gameli Gadzo & John Gartchie Gatsi & Mavis Pobbi, 2017. "Fiscal Aggregates, Government Borrowing and Economic Growth in Ghana An error correction approach," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 7(2), pages 1-5.
    4. Hettich, Frank & Svane, Minna Selene, 1998. "Environmental policy in a two sector endogenous growth model," Discussion Papers, Series I 290, University of Konstanz, Department of Economics.
    5. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
    6. Ms. Hélène Poirson, 2006. "The Tax System in India: Could Reform Spur Growth?," IMF Working Papers 2006/093, International Monetary Fund.
    7. repec:ebl:ecbull:v:8:y:2004:i:1:p:1-8 is not listed on IDEAS
    8. Ulrike Vogelgesang, 2001. "Optimal Capital Income Taxation and Redistribution," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 412-434, August.
    9. Cassou, Steven P. & Lansing, Kevin J., 1998. "Optimal fiscal policy, public capital, and the productivity slowdown," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 911-935, June.
    10. Felipa de Mello‐Sampayo & Sofia de Sousa‐Vale & Francisco Camões & Orlando Gomes, 2012. "Protectionism under R&D policy: innovation rate and welfare," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 39(1), pages 106-124, January.
    11. Thomas Bwire & Oliver Morrissey & Tim Lloyd, 2013. "Foreign Aid, Public Sector and Private Consumption: a Cointegrated Vector Autoregressive Approach," WIDER Working Paper Series wp-2013-094, World Institute for Development Economic Research (UNU-WIDER).
    12. Felipa de Mello-Sampayo & Sofia de Sousa-Vale & Francisco Camões, 2007. "Accelerating Innovation: National R&D Subsidies versus Foreign R&D Tax Credits," Working Papers Series 1 ercwp0108, ISCTE-IUL, Business Research Unit (BRU-IUL).
    13. Hettich, Frank, 1997. "Growth effects of a revenue neutral environmental tax reform," Discussion Papers, Series II 351, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    14. Bwire, Thomas & Lloyd, Tim & Morrissey, Oliver, 2013. "Foreign Aid, Public Sector and Private Consumption: A Cointegrated Vector Autoregressive Approach," WIDER Working Paper Series 094, World Institute for Development Economic Research (UNU-WIDER).
    15. Manuel Gomez, 2003. "Effects of Flat-Rate Taxes: to What Extent Does the Leisure Specification Matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 404-430, April.
    16. Manuel A. Gómez, 2004. "The effect of the government temporal horizon on the optimal tax structure," Economics Bulletin, AccessEcon, vol. 8(1), pages 1-8.
    17. Gomez, Manuel A., 2007. "Optimal tax structure in a two-sector model of endogenous growth," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 305-325, June.
    18. Steven P. Cassou & Kevin J. Lansing, 1996. "Growth effects of a flat tax," Working Papers (Old Series) 9615, Federal Reserve Bank of Cleveland.
    19. Gulgun Cigdem & Merve Altaylar, 2021. "Nonlinear Relationship between Economic Growth and Tax Revenue in Turkey: Hidden Cointegration Approach," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 71(1), pages 21-38, June.
    20. Xavier Pautrel, 2009. "Time-separable Utility, Leisure and Human Capital Accumulation: What New Implications for the Environment-Growth Nexus?," Working Papers 2009.104, Fondazione Eni Enrico Mattei.
    21. Giancarlo Corsetti & Nouriel Roubini, 1996. "Optimal Government Spending and Taxation in Endgenous Growth Models," NBER Working Papers 5851, National Bureau of Economic Research, Inc.
    22. Pablo Serra & Daniel Hojman, 2000. "A Note on the Optimality of the Cash Flow Tax," Documentos de Trabajo 83, Centro de Economía Aplicada, Universidad de Chile.

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    More about this item

    Keywords

    WP; income tax; physical capital; growth-maximizing tax structure; income taxation; accumulation technology; long-run growth; uniform consumption tax; tax measure; tax variable; analysis consumption tax; distortionary tax; optimal taxation plan; taxation analysis; physical capital taxation; Human capital; Consumption taxes; Income tax systems; Capital income tax; Income and capital gains taxes;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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