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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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    Cited by:

    1. Květa Kubátová, 2009. "Optimal Taxation - Review of Theory [Optimální zdanění - přehled dosavadní teorie]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2009(3), pages 24-36.
    2. 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.
    3. 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.
    4. Florencia Amábile & Rómulo A. Chumacero, 2023. "Should I stay or should I go?: the economic incentives of intergenerational taxes and transfers in Uruguay," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 493-524, April.

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