TY - JOUR

T1 - Growth and welfare effects of tax cuts

T2 - The case of a productive public input with technological risk

AU - Ott, Ingrid

AU - Soretz, Susanne

PY - 2004/6

Y1 - 2004/6

N2 - This paper analyzes the dynamic impact of tax cuts within a stochastic model of endogenous growth with a congested public input. A decreasing taxation of deterministic income parts leads to the well-known positive growth effect. Nevertheless, due to the insurance effect associated with the taxation of stochastic income flows, the overall growth impact of taxation is ambiguous. It is shown that the optimal structure of financing government expenditure does not only depend on the degree of rivalry but also on the degree of risk aversion. The optimal real value of government debt decreases with a rise in congestion. We identify that in the case of proportional congestion, the base for tax cuts should be the growth neutral consumption tax. Maximizing the growth rate does not automatically coincide with maximizing welfare. Hence, the base for tax cuts gains importance to realize a welfare optimal policy.

AB - This paper analyzes the dynamic impact of tax cuts within a stochastic model of endogenous growth with a congested public input. A decreasing taxation of deterministic income parts leads to the well-known positive growth effect. Nevertheless, due to the insurance effect associated with the taxation of stochastic income flows, the overall growth impact of taxation is ambiguous. It is shown that the optimal structure of financing government expenditure does not only depend on the degree of rivalry but also on the degree of risk aversion. The optimal real value of government debt decreases with a rise in congestion. We identify that in the case of proportional congestion, the base for tax cuts should be the growth neutral consumption tax. Maximizing the growth rate does not automatically coincide with maximizing welfare. Hence, the base for tax cuts gains importance to realize a welfare optimal policy.

KW - Congestion

KW - Growth

KW - Tax cuts

KW - Uncertainty

KW - Economics

UR - http://www.scopus.com/inward/record.url?scp=11944274596&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/8174b2a5-058a-31bb-888b-7a8801335b39/

U2 - 10.1007/s10663-004-1077-0

DO - 10.1007/s10663-004-1077-0

M3 - Journal articles

AN - SCOPUS:11944274596

VL - 31

SP - 117

EP - 135

JO - Empirica

JF - Empirica

SN - 0340-8744

IS - 2-3

ER -