Distortionary Taxes and Public Investment in a Model of Endogenous Investment Specific Technological Change
Monisankar Bishnu,
Chetan Ghate and
Pawan Gopalakrishnan
MPRA Paper from University Library of Munich, Germany
Abstract:
We construct a model of endogenous investment specific techological change in which the stock of public capital influences the real price of capital goods. We show that the growth and welfare maximizing tax rates coincide in the planned economy. When factor income taxes finance public investment infintely many tax-subsidy combinations can decentralize the planner's allocations. The optimal capital income tax can be positive in this environment. We then augment the model to incorporate administrative costs. A unique combination of factor income taxes now decentralizes the planner's allocations. A simple calibration exercise suggests that changes in factor income taxes does not cause a significant change in the optimal growth rate or welfare. Our framework broadens the environment in which investment specific technological change occurs, and characterizes the role of optimal factor income taxation in raising long run growth and welfare.
Keywords: Investment Specific Technological Change; Endogenous Growth; Capital Income Taxation; Public Policy; Administrative Costs (search for similar items in EconPapers)
JEL-codes: E2 E6 H2 O4 (search for similar items in EconPapers)
Date: 2011-10-14
New Economics Papers: this item is included in nep-acc, nep-cis, nep-dge, nep-fdg, nep-mac and nep-res
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https://mpra.ub.uni-muenchen.de/34111/1/MPRA_paper_34111.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/38182/1/MPRA_paper_38182.pdf revised version (application/pdf)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34111
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