An Alternative View of Taxation and Endogenous Growth
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Date
2001
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Vanderbilt University
Abstract
In this paper, a modification is made to the endogenous growth model studied by Lucas [1988]. It is shown that if individuals derive utility from their level of human capital, then a tax on the return to physical capital can raise the equilibrium growth rate. Consumption taxation may increase the growth rate. If there is an externality in production of human capital, then it may be optimal to impose a capital tax, as opposed to a subsidy, to achieve the optimal growth rate. This may be a reason why existing estimates of the welfare costs of capital taxation may be overstated.