Growth and welfare: distorting versus non-distorting taxes



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Marrero, Gustavo A. and Novales Cinca, Alfonso (2003) Growth and welfare: distorting versus non-distorting taxes. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 02, 2003, ]

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Some concepts associated with the notion of public consumption could be considered as wasteful public expenditures, so that a firstbest analysis would set their level equal to zero every period. However, their ratio to output is significant and rather stable over time in actual economies. In an endogenous growth framework similar to
Barro (1990), we analytically characterize the dependence of a secondbest public investment policy on wasteful public consumption. We compare two extreme tax systems: a distorting system and a nondistorting one. The presence of wasteful expenditures affect optimal public investment and the optimal public financing mechanism. Since private agents do not internalize the fact that by raising their capital
accumulation they could be generating extra public investment and consumption, financing public expenditures through lump-sum taxes might lead to an excessive crowding-out impact on current consumption, which may sharply reduce welfare in the short-run as well as limit public capital accumulation and long-run growth. It turns out that this effect can be more damaging for growth and welfare than the disincentive created on private capital accumulation when taxing capital income.

Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Endogenous growth, Distorting taxes, Public investment, Wasteful public expenditure
Subjects:Social sciences > Economics > Public finance
JEL:E0, E6, O4
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:7697
Deposited On:10 Mar 2008
Last Modified:21 Jun 2017 12:26

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