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Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation

  • Kazi Iqbal

    (World Bank)

  • Stephen Turnovsky

    (University of Washington)

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.

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File URL: http://www.econ.washington.edu/user/sturn/Iqbal-Turnovsky_JPET06089-FINAL.pdf
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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2007-21-P.

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Date of creation: Oct 2007
Date of revision: Oct 2007
Publication status: Published in Journal of Public Economic Theory, Volume 10, 2008,27-53
Handle: RePEc:udb:wpaper:uwec-2007-21-p
Contact details of provider: Postal: Box 353330, Seattle, WA 98193-3330
Web page: http://www.econ.washington.edu/
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  1. Cecilia Garcia-Penalosa & Stephen Turnovsky, 2004. "Second-Best Optimal Taxation of Capital and Labor in a Developing Economy," Working Papers UWEC-2004-05-P, University of Washington, Department of Economics, revised Apr 2004.
  2. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, . "Capital income taxation when inherited wealth is not observable," CORE Discussion Papers RP -1700, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  4. 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.
  5. Tom Sefton, 2004. "A Fair Share of Welfare: Public Spending on Children in England," CASE Reports casereport25, Centre for Analysis of Social Exclusion, LSE.
  6. Stephen Turnovsky, 1998. "Fiscal Policy, Elastic Labor Supply, and Endogenous Growth," Working Papers 0068, University of Washington, Department of Economics.
  7. Nourry, C., 1998. "Stability of Equilibria in the Overlapping Generations Model with Endogenous Labor Supply," G.R.E.Q.A.M. 98a01, Universite Aix-Marseille III.
  8. 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.
  9. 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, 08.
  10. 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, 01.
  11. Gervais, Martin, 2012. "On the optimality of age-dependent taxes and the progressive U.S. tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 682-691.
  12. repec:cup:cbooks:9780521806428 is not listed on IDEAS
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