Do Distortionary Taxes Always Harm Growth?

Posted: 13 Jun 2010

See all articles by Tetsugen Haruyama

Tetsugen Haruyama

Kobe University - Graduate School of Economics

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management

Date Written: June 11, 2010

Abstract

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

Suggested Citation

Haruyama, Tetsugen and Itaya, Jun-ichi, Do Distortionary Taxes Always Harm Growth? (June 11, 2010). Journal of Economics, Vol. 87, No. 2, 2006. Available at SSRN: https://ssrn.com/abstract=1623721

Tetsugen Haruyama (Contact Author)

Kobe University - Graduate School of Economics ( email )

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HOME PAGE: http://www.econ.kobe-u.ac.jp/~haruyama/

Jun-ichi Itaya

Hokkaido University - Division of Modern Economics and Management ( email )

Sapporo 060-0809
Japan

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