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The welfare cost of taxation and endogenous growth

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  • Chamley, Christophe

Abstract

The marginal efficiency costs of different taxes is analyzed in three models with endogenous growth, and the values are compared with those found in standard models. The models analyze how taxes affect (i) the trade-off between human capital accumulation and leisure, (ii) the intertemporal trade-off in consumption, and (iii) the trade-offs in a two-sector model. In general, the efficiency cost in models with endogenous growth may be greater or lower than in models with exogenous growth. When the value of the efficiency cost is very large, it is found to be very sensitive to the specification of the model, and it is reduced dramatically when government expenditures are a production input. In the two-sector model, the only tax which has a very high efficiency cost is the tax on time spent for human capital accumulation, and it may not be empirically important. It is verified that a positive impact of a tax reform on the long-term growth rate is not indicative of welfare improvement.

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  • Chamley, Christophe, 1992. "The welfare cost of taxation and endogenous growth," UC3M Working papers. Economics 2890, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:2890
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    1. Gary S. Becker & Kevin M. Murphy & Robert Tamura, 1994. "Human Capital, Fertility, and Economic Growth," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition, pages 323-350, National Bureau of Economic Research, Inc.
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    1. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, vol. 79(1), pages 55-69, January.
    2. Antoine d'Autume, 1994. "Choix éducatifs, équilibre général et croissance économique," Économie et Prévision, Programme National Persée, vol. 116(5), pages 35-48.
    3. de Hek, Paul A., 2006. "On taxation in a two-sector endogenous growth model with endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 30(4), pages 655-685, April.
    4. Turnovsky, Stephen J., 1996. "Optimal tax, debt, and expenditure policies in a growing economy," Journal of Public Economics, Elsevier, vol. 60(1), pages 21-44, April.
    5. Koichi Futagami & Kazuo Mino, 1995. "Public capital and patterns of growth in the presence of threshold externalities," Journal of Economics, Springer, vol. 61(2), pages 123-146, June.
    6. 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.
    7. Yılmaz, Ensar, 2013. "Competition, taxation and economic growth," Economic Modelling, Elsevier, vol. 35(C), pages 134-139.
    8. Chakraborty, Bidisha & Gupta, Manash Ranjan, 2009. "Human capital, inequality, endogenous growth and educational subsidy: A theoretical analysis," Research in Economics, Elsevier, vol. 63(2), pages 77-90, June.

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