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Tax Policy and Human Capital Formation with Public Investment in Education

  • Simone Valente

    (Institute of Economic Research WIF , Swiss Federal Institute of Technology Zurich ETH)

This paper studies the effects of distortionary taxes and public investment in an endogenous growth OLG model with knowledge transmission. Fiscal policy affects growth in two respects: First, work time reacts to variations of prospective tax rates and modifies knowledge formation; second, public spending enhances labour efficiency but also stimulates physical capital through increased savings. It is shown that Ramsey-optimal policies reduce savings due to high tax rates on young generations, and are not necessarily growth-improving with respect to a pure private system. Non-Ramsey policies that shift the burden on adults are always growth-improving due to crowding-in effects: the welfare of all generations is unambiguously higher with respect to a private system, and there generally exists a continuum of non-optimal tax rates under which long-run growth and welfare are higher than with the Ramsey-optimal policy.

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Paper provided by EconWPA in its series Macroeconomics with number 0507002.

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Length: 30 pages
Date of creation: 07 Jul 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0507002
Note: Type of Document - pdf; pages: 30
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  1. Jose De Gregorio & Se-Jik Kim, 1994. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," IMF Working Papers 94/47, International Monetary Fund.
  2. Eckstein, Z. & Zilcha, I., 1991. "The Effects of Compulsury Schooling on Growth Income Distribution and Welfare," Papers 38-91, Tel Aviv.
  3. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  4. Ben J. Heijdra & Johanna Elisabeth Ligthart, 1998. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," IMF Working Papers 98/182, International Monetary Fund.
  5. Bovenberg, A.L. & van Ewijk, C., 1997. "Progressive taxes, equity and human capital accumulation in an endogenous growth model with overlapping generations," Other publications TiSEM 6d8dd905-8f4d-4b98-8202-1, Tilburg University, School of Economics and Management.
  6. Yakita, Akira, 2003. "Taxation and growth with overlapping generations," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 467-487, March.
  7. Docquier, Frederic & Michel, Philippe, 1999. " Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 425-40, September.
  8. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
  9. Hendricks, Lutz A., 1999. "Taxation and Long-Run Growth," Staff General Research Papers 11933, Iowa State University, Department of Economics.
  10. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  12. Meijdam, A.C., 1998. "Taxes, Growth and Welfare in an Endogenous Growth Model with Overlapping Generations," Discussion Paper 1998-133, Tilburg University, Center for Economic Research.
  13. Hendricks, Lutz, 1999. "Taxation and long-run growth1," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 411-434, April.
  14. Willem H. Buiter & Kenneth M. Kletzer, 1995. "Capital Mobility, Fiscal Policy, and Growth under Self-Financing of Human Capital Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 163-94, November.
  15. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  16. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
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