Implications of productive government spending for fiscal policy

Betty Daniel () and Si Gao

Journal of Economic Dynamics and Control, 2015, vol. 55, issue C, 148-175

Abstract: The standard assumption in macroeconomics that government spending is unproductive can have substantive implications for tax and spending policy. Productive government spending introduces a positive feedback between the tax rate, the productive capacity of the economy, and tax revenue. We allow marginal tax revenue to be optimally allocated between productive subsidies to human capital and utility-enhancing government consumption and calculate Laffer Curves for the US. Productive government spending yields higher revenue-maximizing tax rates, steeper slopes at low tax rates and higher peaks. The differences are particularly pronounced for the labor-tax Laffer curve. The use of tax revenue is an important determinant of the actual revenue that a tax rate increase generates.

Keywords: Fiscal policy; Laffer curve; Welfare; Human capital (search for similar items in EconPapers)
JEL-codes: E62 H20 H52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:55:y:2015:i:c:p:148-175

DOI: 10.1016/j.jedc.2015.04.004

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