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Government Expenditure and Long-Run Stochastic Growth

  • Christiane Clemens

This paper employs a stochastic endogenous growth model with productive government expenditure to analyze the macroeconomic effects of income taxation. We demonstrate that in the presence of capital and income risk the impact of taxation on consumption choice as well as on economic growth is ambiguous as it affects the mean as well as the variance of disposable income. We observe that the effects of taxation crucially depend on the degree of risk aversion and on the capital income share. It is possible to solve for welfare maximizing policies, but contrary to the deterministic framework, welfare and growth maximizing policies do not necessarily coincide and multiple solutions for optimal tax rates can be found.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 133.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:133
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