Hostname: page-component-77c89778f8-rkxrd Total loading time: 0 Render date: 2024-07-23T07:27:18.606Z Has data issue: false hasContentIssue false
  • English
  • Français

ENDOGENOUS GROWTH WITH PUBLIC CAPITAL AND PROGRESSIVE TAXATION

Published online by Cambridge University Press:  07 May 2014

Constantine Angyridis
Constantine Angyridis*
Affiliation:
Ryerson University
*
Address correspondence to: Constantine Angyridis, 350 Victoria Street, Toronto, Ontario M5B 2K3, Canada; e-mail: cangyridis@economics.ryerson.ca.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper considers an endogenous growth model with public capital and heterogeneous agents. Heterogeneity is due to differences in discount factors and inherent abilities. This allows us to closely approximate the 2007 U.S. income and wealth distributions. Government expenditures, including public investment, are financed through a progressive income tax along with a flat tax on consumption. Three revenue-neutral fiscal policy reforms are considered: (i) an increase in the degree of progressivity of the tax schedule that reduces the after-tax income distribution Gini coefficient to its lowest value over the period 1979–2009, (ii) a reduction in the progressivity ratio that causes the Gini coefficient of the wealth distribution to come close to 1, and (iii) an increase in the fraction of output allocated to public investment that has the same positive impact on the growth rate as reform (ii). It is shown that increasing investment in public capital is the only type of policy that simultaneously enhances growth and reduces both types of inequality (income and wealth). We also find that the public-investment-to-output ratio that maximizes social welfare crucially depends on the elasticity of the labor supply. With a more elastic labor supply the optimal ratio is 4.40%, whereas with a less elastic labor supply it is 5.53%.

Keywords

Nonlinear Income TaxationEndogenous GrowthTaxesWelfareGovernment ExpenditurePublic Capital
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1220 - 1239
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Arnold, Jens (2008) Do Tax Structures Affect Economic Growth? Empirical Evidence from a Panel of OECD Countries. Organization for Economic Cooperation and Development (OECD) Economics Department Working Papers (643), 1–28.Google Scholar
Arrow, Kenneth J. (1962) The economic implications of learning by doing. Review of Economic Studies 29, 155–173.CrossRefGoogle Scholar
Arslanalp, S., Bornhorst, F., Gupta, S., and Sze, E. (2010) Public Capital and Growth. IMF working paper WP/10/175, pp. 1–34.Google Scholar
Atolia, Manoj, Bassam, Awad, and Marquis, Milton (2011) Linearization and higher-order approximations: How good are they? Computational Economics 38, 1–31.CrossRefGoogle Scholar
Barro, Robert J. (2000) Inequality and growth in a panel of countries. Journal of Economic Growth 5 (March), 5–32.CrossRefGoogle Scholar
Bastagli, F., Coady, D., and Gupta, S. (2012) Income Inequality and Fiscal Policy. IMF staff discussion note SDN/12/08 (revised), pp. 1–36.Google Scholar
Berg, A.G., Ostry, J.D., and Zettelmeyer, J. (2012) What makes growth sustained? Journal of Development Economics 98, 149–166.CrossRefGoogle Scholar
Canning, David and Pedroni, Peter (2008) Infrastructure long-run economic growth and causality tests for cointegrated panels. Manchester School 76 (5) (Special Issue), 504–527.CrossRefGoogle Scholar
Carroll, Daniel R. and Young, Eric R. (2011) The long run effects of changes in tax progressivity. Journal of Economic Dynamics and Control 35, 1451–1473.CrossRefGoogle Scholar
Cassou, Steven P. and Lansing, Kevin J. (1998) Optimal fiscal policy, public capital, and the productivity slowdown. Journal of Economic Dynamics and Control 22, 911–935.CrossRefGoogle Scholar
Cassou, Steven P. and Lansing, Kevin J. (2004) Growth effects of shifting from a graduated-rate tax system to a flat tax. Economic Inquiry 42, 194–213.CrossRefGoogle Scholar
Cassou, Steven P. and Lansing, Kevin J. (2006) Tax reform with useful public expenditures. Journal of Public Economic Theory 8, 631–676.CrossRefGoogle Scholar
Chatterjee, Santanu and Turnovsky, Stephen J. (2012) Infrastructure and inequality. European Economic Review 56 (8), 1730–1745.CrossRefGoogle Scholar
Congressional Budget Office [CBO] (2012) The Distribution of Household Income and Average Federal Tax Rates, 2008 and 2009, July.Google Scholar
Díaz-Giménez, J., Glover, A., and Ríos-Rull, J-V. (2011) Facts on the distributions of earnings, income, and wealth in the United States: 2007 update. Federal Reserve Bank of Minneapolis Quarterly Review 34 (1), 2–31.Google Scholar
Forbes, Kristin J. (2000) A reassessment of the relationship between inequality and growth. American Economic Review 90 (4), 869–887.CrossRefGoogle Scholar
Futagami, Koichi, Yuichi, Morita, and Shibata, Akihisa (1993) Dynamic analysis of an endogenous growth model with public capital. Scandinavian Journal of Economics 95 (4), 607–625.CrossRefGoogle Scholar
García-Peñalosa, Cecilia and Turnovsky, Stephen J. (2011) Taxation and income distribution dynamics in a neoclassical growth model. Journal of Money, Credit and Banking 43 (8), 1543–1577.CrossRefGoogle Scholar
Greenwood, J., Hercowitz, Z., and Huffman, G.W. (1988) Investment, capacity utilization and the real business cycle. American Economic Review 78 (3), 402–417.Google Scholar
Hendricks, Lutz (2007) How important is discount rate heterogeneity for wealth inequality? Journal of Economic Dynamics and Control 31, 3042–3068.CrossRefGoogle Scholar
Horton, M., Kumar, M., and Mauro, P. (2009) The State of Public Finances: A Cross-Country Fiscal Monitor. IMF Staff Position Note 09/21, pp. 1–32.Google Scholar
King, R.G., Plosser, C.I., and Rebelo, S.T. (2002) Production, growth and business cycles: Technical appendix. Computational Economics 20, 87–116.CrossRefGoogle Scholar
Koyuncu, Murat (2011) Can progressive taxation account for cross-country variation in labor supply? Journal of Economic Dynamics and Control 35, 1474–1488.CrossRefGoogle Scholar
Krusell, Per and Smith, Anthony A. Jr. (1998) Income and wealth heterogeneity in the macroeconomy Journal of Political Economy 106 (5), 867–896.CrossRefGoogle Scholar
Lansing, Kevin J. (1998) Optimal fiscal policy in a business cycle model with public capital Canadian Journal of Economics 31 (2), 337–364.CrossRefGoogle Scholar
Lawrance, Emily C. (1991) Poverty and the rate of time preference: Evidence from panel data. Journal of Political Economy 99 (1), 54–77.CrossRefGoogle Scholar
Li, Wenli and Sarte, Pierre-Daniel (2004) Progressive taxation and long-run growth. American Economic Review 94 (5), 1705–1716.CrossRefGoogle Scholar
McGrattan, E.R., Rogerson, R., and Wright, R. (1997) An equilibrium model of the business cycle with household production and fiscal policy. International Economic Review 38 (2), 267–290.CrossRefGoogle Scholar
Piketty, Thomas and Saez, Emmanuel (2013) Top incomes and the Great Recession: Recent evolutions and policy implications. IMF Economic Review 61 (3), 456–478.CrossRefGoogle Scholar
Romer, Paul (1986) Increasing returns and long-run growth Journal of Political Economy 94, 1002–1037.CrossRefGoogle Scholar
Suen, Richard M.H. (2014) Time preference and the distributions of wealth and income. Economic Inquiry 52 (1), 364–381.CrossRefGoogle Scholar
Turnovsky, Stephen J. (1997) Fiscal policy in a growing economy with public capital. Macroeconomic Dynamics 1, 615–639.CrossRefGoogle Scholar
Warner, John T. and Pleeter, Saul (2001) The personal discount rate: Evidence from military downsizing programs. American Economic Review 91 (1), 33–53.CrossRefGoogle Scholar