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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: [email protected].
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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 

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