Working Paper: NBER ID: w4881
Authors: Nouriel Roubini; Gian Maria Milesi-Ferretti
Abstract: This paper examines the effects of taxation of human capital, physical capital and foreign assets in a multi-sector model of endogenous growth. It is shown that in general the growth rate is reduced by taxes on capital and labor (human capital) income. When the government faces no borrowing constraints and is able to commit to a given set of present and future taxes, it is shown that the optimal tax plan involves high taxation of both capital and labor in the short run. This allows the government to accumulate sufficient assets to finance spending without any recourse to distortionary taxation in the long run. When restrictions to government borrowing and lending are imposed, the model implies that human and physical capital should be taxed similarly.
Keywords: Taxation; Endogenous Growth; Open Economies; Human Capital; Physical Capital
JEL Codes: H21; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taxes on capital and labor income (H24) | Growth rate (O42) |
| High short-term taxation of capital and labor (H31) | Asset accumulation (G51) |
| Asset accumulation (G51) | Long-term growth (D25) |
| Zero tax on human and physical capital (H29) | Optimal tax plan (H21) |
| Tax on physical capital = 0 (H29) | Tax on foreign assets = 0 (F38) |