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On Taxation in a Two-Sector Endogenous Growth Model with Endogenous Labor Supply

Paul de Hek (dehek@seor.eur.nl)

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: This paper studies the effects of taxation on long-run growth in a two-sector endogenous growth model with (i) physical capital as an input in the education sector and (ii) leisure as an additional argument in the utility function. Due to the flexibility of labor supply, taxation of income may induce agents to spend more or less time on leisure activities. Income taxation - the same rate applies for capital and labor income - reduces the growth rate. The contribution of endogenous leisure in this case is confined to reducing or increasing the size of the effect on the growth rate. The same is true if only labor income is taxed. However, if only capital income is taxed, the sign of the effect may reverse. In that case, the positive effect of the increase in total non-leisure time dominates the direct negative effect, implying that capital taxation increases the long-run growth rate.

Pages: 38 pages JEL Classification: E20, H20, J22, J24, O41
Date: 2005-06
New Economics Papers: this item is included in nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: On taxation in a two-sector endogenous growth model with endogenous labor supply (2006) Downloads
Working Paper: On Taxation in a Two-Sector Endogenous Growth Model with Endogenous Labor Supply (2003) Downloads
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