Fiscal policy and welfare in an endogenous growth model with heterogeneous endowments
This paper analyzes an endogenous growth model where agents have different factor endowments and government finances public expenditure by imposing two flat-tax rates, one on capital income and one on labor income. The main finding is that, in the absence of lump-sum redistributions, heterogeneity of endowments is crucial to determine the optimal fiscal policy; in particular, taxing capital income is always optimal.
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