Working Paper: CEPR ID: DP1979
Authors: Gian Maria Milesi-Ferretti; Nouriel Roubini
Abstract: The effects of income and consumption taxation are examined in the context of models in which the growth process is driven by the accumulation of human and physical capital. The different channels through which these taxes affect economic growth are discussed. It is shown that the effects of taxation on growth depend crucially on whether the sector producing human capital is a market sector, on the technology for human capital accumulation and on the specification of the leisure activity. In general, the taxation of factor incomes (human and physical capital) is growth-reducing, while the effects of a consumption tax depend on the specification of leisure. The paper also derives implications for the growth-maximizing choice of tax instruments.
Keywords: economic growth; income taxation; consumption taxation
JEL Codes: E62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taxation of factor incomes (E25) | Economic growth (O00) |
| Higher taxation on capital (F38) | Lower rates of return (G19) |
| Higher taxation on capital (F38) | Discourages investment in physical and human capital (E22) |
| Consumption tax (conditional on leisure) (H31) | Economic growth (O00) |
| Subsidies to education (H52) | Mitigate negative effects of labor income taxes on growth (H31) |