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Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation

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  • Kazi Iqbal

    (World Bank)

  • Stephen Turnovsky

    (University of Washington)

Abstract

This paper studies optimal taxation in the context of provision of public goods when benefits are age-dependent. We develop a two period overlapping generations model with endogenous labor supply in both periods. We examine how the optimal Ramsey capital and labor income taxes change when the government fails to choose the optimal public provision for each cohort. The deviations of public expenditure from the optimal level create distortions at the intra and inter temporal margins and taxes are required to correct these distortions. We show that regardless of preferences, the government may choose to tax capital in the long run if spending on each cohort is not optimal. We also show that when sufficient tax instruments are available the Ramsey equilibrium can attain the first-best optimum.

Suggested Citation

  • Kazi Iqbal & Stephen Turnovsky, 2007. "Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation," Working Papers UWEC-2007-21-P, University of Washington, Department of Economics, revised Oct 2007.
  • Handle: RePEc:udb:wpaper:uwec-2007-21-p
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    References listed on IDEAS

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    1. Garcia Penalosa, Cecilia & Turnovsky, Stephen J., 2005. "Second-best optimal taxation of capital and labor in a developing economy," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1045-1074, June.
    2. Cremer, Helmuth & Pestieau, Pierre & Rochet, Jean-Charles, 2003. "Capital income taxation when inherited wealth is not observable," Journal of Public Economics, Elsevier, vol. 87(11), pages 2475-2490, October.
    3. Andres Erosa & Martin Gervais, 2001. "Optimal taxation in infinitely-lived agent and overlapping generations models : a review," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 23-44.
    4. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 338-369, August.
    5. Nourry, Carine, 2001. "Stability of equilibria in the overlapping generations model with endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1647-1663, October.
    6. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, March.
    7. 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 607-625, December.
    8. Philippe Michel & Pierre Pestieau, 2004. "Fiscal Policy in an Overlapping Generations Model with Bequest-as-Consumption," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(3), pages 397-407, August.
    9. Mats Persson & Torsten Persson & Lars E. O. Svensson, 2006. "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica, Econometric Society, vol. 74(1), pages 193-212, January.
    10. Tom Sefton, 2004. "A Fair Share of Welfare: Public Spending on Children in England," CASE Reports casereport25, Centre for Analysis of Social Exclusion, LSE.
    11. Turnovsky, Stephen J., 2000. "Fiscal policy, elastic labor supply, and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 185-210, February.
    12. Gervais, Martin, 2009. "On the optimality of age-dependent taxes and the progressive U.S. tax system," Discussion Paper Series In Economics And Econometrics 0905, Economics Division, School of Social Sciences, University of Southampton.
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    Cited by:

    1. Gaumont, D. & Leonard, D., 2010. "Human capital, externalities and growth in an overlapping generations model," Research in Economics, Elsevier, vol. 64(3), pages 186-200, September.
    2. Květa Kubátová, 2009. "Optimal Taxation - Review of Theory," Český finanční a účetní časopis, University of Economics, Prague, vol. 2009(3), pages 24-36.
    3. Altar, Moisa & Necula, Ciprian & Bobeica, Gabriel, 2008. "Modeling The Economic Growth In Romania. The Influence Of Fiscal Regimes," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(4), pages 146-160, December.

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