Long-run growth and welfare effects of public policies with distortionary taxation

Baier, Scott L.; Glomm, Gerhard

doi:10.1016/s0165-1889(00)00017-8

Cited by 107 publications

(96 citation statements)

References 23 publications

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“…In all cases we obtain estimates of the elasticity of substitution, well below unity. 33 See also Baier and Glomm (2001). Since the public good is an aggregate, comprising a mix, some of which are complements and others substitutes to private capital, we restrict the range of variation of  .…”

Section:  mentioning

confidence: 99%

Productive government spending and its consequences for the growth–inequality tradeoff

Getachew

Turnovsky

2015

Research in Economics

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This paper investigates the effects of productive government spending on the relationship between growth and inequality in an economy subject to idiosyncratic production shocks and heterogeneous endowments. Assuming lognormal distributions, we derive tractable closed form solutions describing the equilibrium dynamics. We show how the effect of government investment on the equilibrium dynamics of both inequality and growth depends crucially upon the elasticity of substitution between public and private capital in production. This has important consequences for the growth-and welfaremaximizing rates of government investment. Finally, we supplement our theoretical analysis with numerical simulations, calibrated to approximate the productive characteristics of a real world economy. With the empirical evidence strongly supporting the complementarity between public and private capital, our simulations suggest that conclusions based on the commonly employed Cobb-Douglas production function may be seriously misleading.Key words: Government investment; Idiosyncratic shocks; Growth; Inequality JEL Classification: D31, O41 Revised versionJune 2015*The paper has benefited from comments received on earlier versions from seminar participants at the University of Durham and the University of Pretoria. We also thank Santanu Chatterjee for useful suggestions. Research for this paper was carried out while Getachew was visiting the University of Washington in the Fall of 2013. Turnovsky"s research was supported in part by the Van Voorhis endowment at the University of Washington.**Corresponding author: sturn@u.washington.edu 1 IntroductionThe role of public investment in infrastructure as a source of economic growth continues to be widely debated in both developing and advanced economies, with different economies adopting different policy options. Several emerging-market countries including India, China, and Brazil have undertaken extensive public investment, to which their high growth rates of recent years may at least in part be attributed. In contrast, several European countries have reduced public spending, as they have pursued austerity measures intended to deal with concerns related to their rising debt levels.Contemporaneously with these diverse policies toward public investment, we have witnessed increasing income inequality, both in emerging markets and in most OECD countries. This raises the important question that we address in this paper, namely the relationship between public investment directed toward growth enhancement and its consequences for income inequality.Interest in the relationship between public investment, output, and growth has a long history, dating back to Arrow and Kurz (1970), who examined it in the context of a neoclassical economy.Beginning with Barro (1990), an extensive literature has evolved addressing the issue in an endogenous growth framework, with a general consensus that government spending on infrastructure can yield significant productivity gains and thus enhance growth. See e.g. F...

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Section:  mentioning

confidence: 99%

Productive government spending and its consequences for the growth–inequality tradeoff

Getachew

Turnovsky

2015

Research in Economics

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“…7 The parameters 0 < 1 1; 0 (1 1 ) < 1 and 0 2 < 1 capture the productivity of private 6 The assumption that individual human capital accumulation is an increasing function of the per capita level of economy-wide human capital encapsulates the idea that the existing know-how of the economy provides an external positive e¤ect. Equivalently it can be thought of as a learning-by-doing e¤ect as discussed in Romer (1986).…”

Section: Householdsmentioning

confidence: 99%

“…Examples of other papers which use the per capita level of aggregate human capital in either the goods or human capital production functions include Lucas (1988), Azariadis and Drazen, (1990), Tamura (1991) and Glomm and Ravikumar (1992). 7 The assumption that individual human capital accumulation depends on the per 6 human capital, aggregate human capital externality and public education spending respectively. 8 Households act competitively by taking prices, policy variables and aggregate outcomes as given.…”

Section: Householdsmentioning

confidence: 99%

“…5, p. 134), we set , the weight given to composite consumption relative to leisure in the utility function, equal to the average value of work versus leisure time, which is obtained using data on hours worked from the EO database. 11 Given the lack of relevant data, we follow the study by Baier and Glomm (2001), and set the relative weight of public consumption services in composite consumption at = 0:1. We also use a value for the intertemporal elasticity of consumption (1= ) that is common in the DSGE literature (i.e.…”

Section: Calibrationmentioning

confidence: 99%

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Tax structure, growth, and welfare in the UK

Angelopoulos

Malley

Philippopoulos

2011

Oxford Economic Papers

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This paper studies the quantitative implications of changes in the composition of taxes for long-run growth and expected lifetime utility in the UK economy over 1970-2005. Our setup is a dynamic stochastic general equilibrium model incorporating a detailed …scal policy structure, and where the engine of endogenous growth is human capital accumulation. The government's spending instruments include public consumption, investment and education spending. On the revenue side, labour, capital and consumption taxes are employed. Our results suggest that if the goal of tax policy is to promote long-run growth by altering relative tax rates, then it should reduce labour taxes while simultaneously increasing capital or consumption taxes to make up for the loss in labour tax revenue. In contrast, a welfare promoting policy would be to cut capital taxes, while concurrently increasing labour or consumption taxes to make up for the loss in capital tax revenue.

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“…The latter is particularly relevant for Europe and is one of the market failures justifying policy intervention in our setup. 4 Our policy instruments include the three major items of public spending (public consumption, investment and transfers) as shares of output and the two main sources of tax revenues (income and consumption tax rates). The government's allocative role in our setup is the provision of public consumption services that augment household's utility and public investment that enhances public capital entering the …rm's production function.…”

Section: Introductionmentioning

confidence: 99%

To react or not? Technology shocks, fiscal policy and welfare in the EU-3

Malley

Philippopoulos

Woitek

2009

European Economic Review

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This paper develops a DSGE model to examine the quantitative macroeconomic implications of counter-cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity and consumption habits, as the particular market failures justifying policy intervention. We subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt-to-output ratio. A welfare analysis reveals that the most effective instrument-target combination is to use public consumption to stabilize the output gap. Moreover, welfare gains from counter-cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits. Finally, since active policy and automatic stabilizers are substitutes, it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers. Abstract This paper develops a DSGE model to examine the quantitative macroeconomic implications of counter-cyclical …scal policy for France, Germany and the UK. The model incorporates real wage rigidity and consumption habits, as the particular market failures justifying policy intervention. We subject the model to productivity shocks and allow policy instruments to react to the output gap and the debtto-output ratio. A welfare analysis reveals that the most e¤ective instrument-target combination is to use public consumption to stabilize the output gap. Moreover, welfare gains from counter-cyclical …scal policy are much stronger in the presence of wage rigidities compared with consumption habits. Finally, since active policy and automatic stabilizers are substitutes, it is possible that relatively undistorted economies may be in need of countercyclical …scal action due to inadequate automatic stabilizers.We would like to thank the editor, Juergen von Hagen, an associate editor and two anonymous referees for constructive suggestions. We also thank Konstantinos Angelopoulos, Paul

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Long-run growth and welfare effects of public policies with distortionary taxation

Cited by 107 publications

References 23 publications

Productive government spending and its consequences for the growth–inequality tradeoff

Productive government spending and its consequences for the growth–inequality tradeoff

Tax structure, growth, and welfare in the UK

To react or not? Technology shocks, fiscal policy and welfare in the EU-3

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