Taxation in the Two‐Sector Neoclassical Growth Model with Sector‐Specific Externalities and Endogenous Labour Supply

28 Pages Posted: 7 May 2013

See all articles by Daisuke Amano

Daisuke Amano

Otaru University of Commerce

Jun‐Ichi Itaya

Hokkaido University

Date Written: June 2013

Abstract

This paper examines the long‐run impacts of selective (or sector‐specific) commodity, payroll, and profit taxes in a two‐sector endogenous growth model with sector‐specific production externalities, in which one sector produces consumption goods and the other produces investment goods. The novelty of the model is that it allows not only for endogenous labour supply but also for the intersectoral allocation of resources, which may together lead to indeterminacy. We analytically show that the stability properties of the long‐run equilibrium critically affect the long‐run effects of these selective taxes, which may reverse the standard results of the growth effects of distortionary taxes.

JEL Classification: H22, J22, O41

Suggested Citation

Amano, Daisuke and Itaya, Jun‐Ichi, Taxation in the Two‐Sector Neoclassical Growth Model with Sector‐Specific Externalities and Endogenous Labour Supply (June 2013). Japanese Economic Review, Vol. 64, Issue 2, pp. 248-275, 2013, Available at SSRN: https://ssrn.com/abstract=2261551 or http://dx.doi.org/10.1111/j.1468-5876.2012.00577.x

Daisuke Amano (Contact Author)

Otaru University of Commerce ( email )

3-5-21 Midori
Otaru-shi, Hokkaido 047-8501
United States

Jun‐Ichi Itaya

Hokkaido University

5 Kita 8 Jonishi, Kita Ward
Hokkaido Prefecture
Sapporo, Hokkaido 060-0808
Japan

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