Do Distortionary Taxes Always Harm Growth?
Posted: 13 Jun 2010
Date Written: June 11, 2010
This paper examines the long-run effects of capital income taxes, labor income taxes, and expenditure taxes in an R&D-based model of endogenous growth with endogenous labor supply. The main contribution of this paper is to investigate how tax effects on long-run growth are influenced by the emergence of indeterminate equilibria. Indeterminacy in this instance arises due to nonseparable preferences between consumption and leisure, in conjunction with prior distortionary taxes. In contrast to conventional wisdom, we show that higher distortionary taxes improve long-run growth, as well as social welfare, when the steady state is indeterminate.
Keywords: endogenous growth, R&D, indeterminacy, distortionary tax
JEL Classification: E62, H20
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