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Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change
TL;DR: In this article, the authors construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods and show that the growth and welfare maximizing tax rates coincide in the planned economy.
Abstract: We construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods. We show that the growth and welfare maximizing tax rates coincide in the planned economy. When factor income taxes finance public investment infintely many tax-subsidy combinations can decentralize the planner's allocations. The optimal capital income tax can be positive in this environment. We then augment the model to incorporate administrative costs. A unique combination of factor income taxes now decentralizes the planner's allocations. A simple calibration exercise suggests that changes in factor income taxes does not cause a significant change in the optimal growth rate or welfare. Our framework broadens the environment in which investment specific technological change occurs, and characterizes the role of optimal factor income taxation in raising long run growth and welfare.
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TL;DR: In this article, the authors considered a Ramsey model of linear taxation for an economy with capital and two kinds of labor and showed that the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive.
Abstract: This paper considers a Ramsey model of linear taxation for an economy with capital and two kinds of labor. If the government cannot distinguish between the return from capital and the return from entrepreneurial labor, then there will be positive capital income taxation, even in the long run. This happens because the only way to tax entrepreneurial labor is by also taxing capital. Furthermore, under fairly general conditions, the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive. Thus, even though both income taxes are positive, imposing uniform income taxation would lead to additional distortions in the economy.
23 citations
TL;DR: In this paper, the authors construct a tractable endogenous growth model with production externalities in which the public capital stock augments investment speci c technological change and show that there exist several labor and capital tax-subsidy combinations that decentralize the planner's growth rate.
5 citations
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...21 See Appendix A for derivations. n1P ¼ xPnP ;n2P ¼ 1−xPð ÞnP ; ð18Þ where ΦP is given by ΦP ¼ 1− αβ 1−βγð Þ−β2μ 1−γð Þ h i 1−βγð Þ−β2 1−γð Þ þ αβ3 1−γð Þ ; ð19Þ and xP is given by xP ¼ 1−αð Þ 1−βγð Þ−β2μ 1−γð Þ−β2 1−γð Þ 1−ΦPð Þ n o 1þ ξð Þ 1−αð Þ 1−βγð Þ−β2μ 1−γð Þ−β2 1−γð Þ 1−ΦPð Þ n o þ βθ 1−ΦPð Þ : ð20Þ Proof....
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...See Appendix C. ■ Lemma 4 implies that a smaller γmakes nCE increase by more for an increase in τn....
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...See Appendix E. growth maximizing tax rate although the planner may not necessarily choose it since the tax rate is arbitrary.24...
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...Hence, there is a unique 22 See Bishnu et al. (2011)....
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...See Appendix A for derivations....
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TL;DR: It is by now incontrovertible that increases in per capita income cannot be explained simply by increases in the capital-labor ratio as mentioned in this paper, and that knowledge is growing in time.
Abstract: It is by now incontrovertible that increases in per capita income cannot be explained simply by increases in the capital-labor ratio. Though doubtless no economist would ever have denied the role of technological change in economic growth, its overwhelming importance relative to capital formation has perhaps only been fully realized with the important empirical studies of Abramovitz [1] and Solow [l 1]. These results do not directly contradict the neo-classical view of the production function as an expression of technological knowledge. All that has to be added is the obvious fact that knowledge is growing in time. Nevertheless a view of economic growth that depends so heavily on an exogenous variable, let alone one so difficult to measure as the quantity of knowledge, is hardly intellectually satisfactory. From a quantitative, empirical point of view, we are left with time as an explanatory variable. Now trend projections, however necessary they may be in practice, are basically a confession of ignorance, and, what is worse from a practical viewpoint, are not policy variables.
7,108 citations
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TL;DR: This article extended these models to include tax- financed government services that affect production or utility, and showed that growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline.
Abstract: One strand of endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include tax- financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.
5,497 citations
TL;DR: In this article, tax-financed government services that affect production or utility are extended to include tax-supported government services, and the two rates rise initially with productive government expenditures but subsequently decline with an increase in utility-type expenditures.
Abstract: One strand of endogenous-growth models assumes constant returns to a broad concept of capital. I extend these models to include tax-financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.
4,959 citations
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TL;DR: In this paper, the authors describe a class of models in which this type of heterogeneity in growth experiences can arise as a result of cross-country differences in government policy, which can also create incentives for labor migration from slow growing to fast growing countries.
Abstract: The wide cross-country disparity in rates of economic growth is the most puzzling feature of the development process. This paper describes a class of models in which this type of heterogeneity in growth experiences can arise as a result of cross-country differences in government policy. These differences in policy regimes can also create incentives for labor migration from slow growing to fast growing countries. In the class of models that we study growth is endogenous but the technology exhibits constant returns to scale and there is a steady state path that accords with Kaldor's stylized facts of economic development. The key to making growth endogenous in the absence of increasing returns is the presence of a "core" of capital goods that can be produced without the direct or indirect contribution of factors that cannot be accumulated, such as land.
3,048 citations
TL;DR: In this paper, the authors describe a class of models in which this heterogeneity in growth experiences can be the result of cross-country differences in government policy, which can also create incentives for labor migration from slow-growing to fast-growing countries.
Abstract: The wide cross-country disparity in rates of economic growth is the most puzzling feature of the development process. This paper describes a class of models in which this heterogeneity in growth experiences can be the result of cross-country differences in government policy. These differences can also create incentives for labor migration from slow-growing to fast-growing countries. In the models considered, growth is endogeneous despite the absence of increasing returns because there is a "core" of capital goods that can be produced without the direct or indirect contribution of factors that cannot be accumulated, such as land.
3,038 citations
Additional excerpts
...Lemma 3 Suppose 0 < < 1: On the steady state balanced growth path, the gross growth rate of Z, K, G and Y are given by (24), and (25) b gz = 1 1+(1 ) = [c Mf( ) (1 )(1) g ] 1 2 ; (24) b gk = b gg = b gz 1 1 1 ; b gy = b gk 1 = b gz 1 1 1 : (25) Proof....
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