Growth Effects of Consumption and Labour Income Taxation in an Overlapping-Generations Life-Cycle Model

30 Pages Posted: 19 Nov 2009

See all articles by Ben J. Heijdra

Ben J. Heijdra

University of Groningen - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jochen O. Mierau

University of Groningen; Netspar

Date Written: October 15, 2009

Abstract

We study labour-income and consumption taxation in an overlapping-generations model featuring endogenous growth due to inter-firm investment externalities. Consumption, saving, and labour supply display life-cycle features because mortality and labour productivity are age dependent and because annuity markets may be imperfect. The government’s method of revenue recycling critically affects the growth consequences of taxation. Purely consumptive government spending has a negative impact on growth. Redistribution of tax revenue from dissavers to savers may lead to an increase in growth due to beneficial intergenerational transfer effects.

Keywords: annuity markets, retirement, endogenous growth, overlapping generations, demography, taxation, intergenerational transfers

JEL Classification: D52, D91, E1, H2, J2, O41

Suggested Citation

Heijdra, Ben J. and Mierau, Jochen O., Growth Effects of Consumption and Labour Income Taxation in an Overlapping-Generations Life-Cycle Model (October 15, 2009). Netspar Discussion Paper No. 10/2009-035, Available at SSRN: https://ssrn.com/abstract=1508424 or http://dx.doi.org/10.2139/ssrn.1508424

Ben J. Heijdra (Contact Author)

University of Groningen - Department of Economics ( email )

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Jochen O. Mierau

University of Groningen ( email )

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