Taxation and Endogenous Growth in Open EconomiesWP/94/77-EA Taxation and Endogenous Growth in Open Economies by Gian Maria Milesi- Ferretti and Nouriel Roubini This paper reconsiders the issue of the optimal taxation of human capital, physical capital and foreign assets in the context of models of endogenous growth. In a neoclassical exogenous growth framework, the standard result (the Chamley-Judd proposition) is that in the long run the optimal tax rate on physical capital income should be zero. In the long run, revenues should be collected only through taxes on labor income (wage taxes) since this is the way to tax the factor in fixed supply (the labor/leisure time endowment). The presence of human capital modifies significantly these results. This happens because labor becomes a reproducible factor (human capital) and, therefore, a source of accumulation and growth in addition to physical capital. This paper studies how the impact on growth of human and physical capital income taxation and of taxation of foreign assets depends on the technologies for human capital accumulation and leisure. The normative implications of the model for the optimal taxation of factor incomes are also derived. The paper shows that there are general specifications under which the optimal long-run tax on both capital and labor income is zero. In these cases, the optimal taxation plan consists of taxing both factors in the short run, and financing spending in the long run through accumulated budget surpluses. Such a solution presupposes the ability of the government to commit to a given path of taxation into the foreseeable future. If restrictions on the ability of the government to borrow and lend are imposed, in the form of a balanced-budget constraint, the model implies that human and physical capital should be taxed similarly. |