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Taxing or subsidizing Factors' rents in a simple endogenous growth model with public capital

This paper tackles the fundamental issue in public finance of wether taxing or subsidizing factor rents. In a one sector endogenous growth model with private and public capital, similar to that in Barro (1990),we find that raising taxes on factors’ income as part of an optimal fiscal policy is a more pervasive result than it seems. The interaction of technological and fiscal externalities is central for this result. For instance, high enough levels of wasteful expenditures to output ratio could make positive income taxes enhance welfare. This ratio would need to be smaller, the lower the spillover externality and/or the larger the elasticities of private and public capital in the private production function.

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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 0303.

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Length: 31 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:ucm:doicae:0303
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  1. Giancarlo Corsetti & Nouriel Roubini, 1996. "Optimal Government Spending and Taxation in Endgenous Growth Models," NBER Working Papers 5851, National Bureau of Economic Research, Inc.
  2. Ratner, Jonathan B., 1983. "Government capital and the production function for U.S. private output," Economics Letters, Elsevier, vol. 13(2-3), pages 213-217.
  3. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  4. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  5. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  6. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  7. Larry E. Jones & Rodolfo E. Manuelli, 1994. "The Sources of Growth," Macroeconomics 9411002, EconWPA, revised 05 Mar 1999.
  8. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  9. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, vol. 79(1), pages 55-69, January.
  10. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April.
  11. Gustavo A. Marrero & Alfonso Novales, 2003. "Growth and Welfare: Distorting versus Non-Distorting Taxes," Documentos de Trabajo del ICAE 0302, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  12. Glomm, Gerhard & Ravikumar, B., 1999. "Competitive equilibrium and public investment plans," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1207-1224, August.
  13. Turnovsky, Stephen J., 2000. "Fiscal policy, elastic labor supply, and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 185-210, February.
  14. 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.
  15. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1042-67, December.
  16. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  17. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
  18. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  19. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, vol. 71(1), pages 1-26, January.
  20. Alicia H. Munnell, 1990. "How does public infrastructure affect regional economic performance?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 34, pages 69-112.
  21. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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