On taxation in a two-sector endogenous growth model with endogenous labor supply

This paper studies 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. Income taxation – the same rate applies for capital and labor income...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2006-04, Vol.30 (4), p.655-685
Main Author: de Hek, Paul A.
Format: Article
Language:English
Subjects:
Correlation analysis
Economic growth
Economic models
Education sector
Flat-rate taxes
Growth models
Human capital
Leisure-dependent utility
Studies
Taxation
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Summary:This paper studies 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. Income taxation – the same rate applies for capital and labor income – reduces the growth rate. The same is true if only labor income is taxed. However, if only capital income is taxed, the positive effect of an increase in total non-leisure time may dominate the direct negative effect, implying that capital taxation increases the long-run growth rate.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2005.02.006