Growth and welfare effects of tax cuts: The case of a productive public input with technological risk
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In: Empirica, Vol. 31, No. 2-3, 06.2004, p. 117-135.
Research output: Journal contributions › Journal articles › Research › peer-review
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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 -