Growth and Welfare: Distorting versus Non-Distorting Taxes

Gustavo A. Marrero () and Alfonso Novales ()

Documentos del Instituto Complutense de Análisis Económico from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales

Abstract: Some concepts associated with the notion of public consumption could be considered as wasteful public expenditures, so that a firstbest analysis would set their level equal to zero every period. However, their ratio to output is significant and rather stable over time in actual economies. In an endogenous growth framework similar to Barro (1990), we analytically characterize the dependence of a second best public investment policy on wasteful public consumption. We compare two extreme tax systems: a distorting system and a nondistorting one. The presence of wasteful expenditures affect optimal public investment and the optimal public financing mechanism. Since private agents do not internalize the fact that by raising their capital accumulation they could be generating extra public investment and consumption, financing public expenditures through lump-sum taxes might lead to an excessive crowding-out impact on current consumption, which may sharply reduce welfare in the short-run as well as limit public capital accumulation and long-run growth. It turns out that this e?ect can be more damaging for growth and welfare than the disincentive created on private capital accumulation when taxing capital income.

Date: 2003
View list of references

Downloads: (external link)
http://eprints.ucm.es/7697/ (application/pdf)

Related works:
Working Paper: Growth and welfare: Distorting versus non-distorting taxes (2001)
Journal Article: Growth and welfare: Distorting versus non-distorting taxes (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ucm:doicae:0302

Access Statistics for this paper

More papers in Documentos del Instituto Complutense de Análisis Económico from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales
Contact information at EDIRC.
Series data maintained by ().