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Optimal Taxation of Human and Physical Capital in Endogenous Capital Models

  • Nouriel Roubini
  • Gian Maria Milesi-Ferrett

This paper studies the effects of human and physical capital income taxation on growth, and examines how these effects depend on the technologies for human capital accumulation and 'leisure'. It then derives the normative implications of the analysis for the optimal taxation of factor incomes. It is shown that in general both capital and labor (human capital) taxes are growth-reducing. In these cases, the optimal long-run tax on both capital and labor income is zero. The optimal taxation plan consists of taxing both factors in the short run, and financing spending in the long run through accumulated budget surpluses.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4882.

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Date of creation: Oct 1994
Date of revision:
Publication status: published as Roubini, Nouriel and Gian Maria Milesi-Ferretti. "On the Taxation of Human and Physical Capital in Models of Endogenous Growth." Journal of Public Economics (1999).
Handle: RePEc:nbr:nberwo:4882
Note: IFM PE
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  7. Razin, Assaf & Yuen, Chi-Wa, 1993. "Convergence in Growth Rates: The Role of Capital Mobility and International Taxation," CEPR Discussion Papers 760, C.E.P.R. Discussion Papers.
  8. 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.).
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  13. 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.
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  16. Tanzi, Vito & Zee, Howell H., 1993. "Time constraints in consumption and savings behavior," Journal of Public Economics, Elsevier, vol. 50(2), pages 253-259, February.
  17. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  18. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  19. 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.
  20. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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