Taxation and Endogenous Growth in Open Economies

Author/Editor:

Nouriel Roubini ; Gian M Milesi-Ferretti

Publication Date:

July 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the effects of taxation of human capital, physical capital and foreign assets in a multi-sector model of endogenous growth. It is shown that in general the growth rate is reduced by taxes on capital and labor (human capital) income. When the government faces no borrowing constraints and is able to commit to a given set of present and future taxes, it is shown that the optimal tax plan involves high taxation of both capital and labor in the short run. This allows the government to accumulate sufficient assets to finance spending without any recourse to distortionary taxation in the long run. When restrictions to government borrowing and lending are imposed, the model implies that human and physical capital should be taxed similarly.

Series:

Working Paper No. 94/77

Subject:

English

Publication Date:

July 1, 1994

ISBN/ISSN:

9781451849943/1018-5941

Stock No:

WPIEA0771994

Format:

Paper

Pages:

36

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