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Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change

  • Bishnu, Monisankar
  • Ghate, Chetan
  • Gopalakrishnan, Pawan

We construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods. We show that the growth and welfare maximizing tax rates coincide in the planned economy. When factor income taxes finance public investment infintely many tax-subsidy combinations can decentralize the planner's allocations. The optimal capital income tax can be positive in this environment. We then augment the model to incorporate administrative costs. A unique combination of factor income taxes now decentralizes the planner's allocations. A simple calibration exercise suggests that changes in factor income taxes does not cause a significant change in the optimal growth rate or welfare. Our framework broadens the environment in which investment specific technological change occurs, and characterizes the role of optimal factor income taxation in raising long run growth and welfare.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34111.

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Date of creation: 14 Oct 2011
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Handle: RePEc:pra:mprapa:34111
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