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Growth and welfare: Distorting versus non-distorting taxes

  • Gustavo A. Marrero
  • Alfonso Novales

    ()

    (Departamento de Economía Cuantitativa, Universidad Complutense de Madrid,)

In an infinitely-lived framework, taxing capital income may be growth and welfare enhancing when it allows for correcting distorting externalities in the competitive equilibrium allocation. This is the case when public capital is subject to congestion by private capital or total income [Fisher and Turnovsky (1998)] or when government expenditure exerts an external e.ect on physical capital [Corsetti and Roubini (1996)]. However, none of these features appear in simple one-sector endogenous growth models with public capital. Alternatively, we consider certain realistic fiscal policy constraints in a simple one-sector growth model with productive and unproductive public expenditures, to show that raising revenues through factor income taxes may be preferred to using lump-sum taxes.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0105.

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Length: 27 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:ucm:doicae:0105
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  24. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1996. "On the Taxation of Human and Physical Capital in Models of Endogenous Growth," CEPR Discussion Papers 1477, C.E.P.R. Discussion Papers.
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