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On Taxation in a Two-Sector Endogenous Growth Model with Endogenous Labor Supply

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Author Info
Paul A. de Hek () (Faculty of Economics, Erasmus University Rotterdam)

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Abstract

This paper examines the effects of taxation on long-run growth in a two-sector endogenous growth model with (i) physical capital as an input in the education sector and (ii) leisure as an additional argument in the utility function. The analysis of the effects of taxation - including income taxation, capital income taxation and labor income taxation - distinguishes between the case with a unique (interior) balanced growth path and the case with multiple balanced growth paths. Due to the flexibility of labor supply, taxation of income may induce agents to spend more or less time on leisure activities. In the case of income taxation, where capital and labor income are taxed equally, the resulting effect on the growth rate is negative. The contribution of endogenous leisure is confined to reducing or increasing the size of the effect on the growth rate. If only capital income is taxed, the direction of the effect may reverse. In that case, the positive effect of the increase in total non-leisure time dominates the direct negative effect, implying that capital taxation increases the long-run growth rate.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-029/2.

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Date of creation: 02 Apr 2003
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Handle: RePEc:dgr:uvatin:20030029

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Related research
Keywords: Taxation; Endogenous growth; Endogenous labor supply.;

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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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References listed on IDEAS
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  1. Pecorino, Paul, 1993. "Tax structure and growth in a model with human capital," Journal of Public Economics, Elsevier, vol. 52(2), pages 251-271, September. [Downloadable!] (restricted)
  2. Mino, Kazuo, 1996. "Analysis of a Two-Sector Model of Endogenous Growth with Capital Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 227-51, February.
  3. Hendricks, Lutz A., 2004. "Taxation and Long-Run Growth," Staff General Research Papers 11933, Iowa State University, Department of Economics.
    Other versions:
  4. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November. [Downloadable!] (restricted)
  5. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  6. Smith, William T., 1996. "Taxes, uncertainty, and long-term growth," European Economic Review, Elsevier, vol. 40(8), pages 1647-1664, November. [Downloadable!] (restricted)
  7. de Hek, Paul A., 1998. "An aggregative model of capital accumulation with leisure-dependent utility," Journal of Economic Dynamics and Control, Elsevier, vol. 23(2), pages 255-276, September. [Downloadable!] (restricted)
  8. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June. [Downloadable!] (restricted)
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  9. Ortigueira, Salvador, 1998. "Fiscal policy in an endogenous growth model with human capital accumulation," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 323-355, July. [Downloadable!] (restricted)
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  10. Ladron-de-Guevara, Antonio & Ortigueira, Salvador & Santos, Manuel S., 1997. "Equilibrium dynamics in two-sector models of endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 115-143, January. [Downloadable!] (restricted)
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  11. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  12. Christophe Chamley, 1992. "The Welfare Cost of Taxation and Endogenous Growth," Boston University - Institute for Economic Development 30, Boston University, Institute for Economic Development.
  13. 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. [Downloadable!] (restricted)
  14. Kocherlakota, Narayana R & Yi, Kei-Mu, 1997. "Is There Endogenous Long-Run Growth? Evidence from the United States and the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 235-62, May.
  15. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January. [Downloadable!] (restricted)
  16. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Karzanova Irina, 2005. "Impact of tax regime on real sector investment in Russia: marginal effective tax rates for physical, human and R&D capital," EERC Working Paper Series 05-16e, EERC Research Network, Russia and CIS. [Downloadable!]
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