Taxation and Endogenous Growth in Open Economies

35 Pages Posted: 12 Jun 2000 Last revised: 30 Jul 2000

See all articles by Nouriel Roubini

Nouriel Roubini

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: October 1994

Abstract

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.

Suggested Citation

Roubini, Nouriel and Milesi-Ferretti, Gian Maria, Taxation and Endogenous Growth in Open Economies (October 1994). NBER Working Paper No. w4881. Available at SSRN: https://ssrn.com/abstract=232052

Nouriel Roubini (Contact Author)

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Gian Maria Milesi-Ferretti

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Centre for Economic Policy Research (CEPR)

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