Output taxation, human capital and growth

Abstract

In this paper we investigate the long-run effects of government spending and taxation in an endogenous growth setting. The model is a variant of Barro's model ('Government Expenditure in a Simple Model of Endogenous Growth', Journal of Political Economy, Vol. 98, 1990, pp. S103-S125) and Lucas's model ('On the Mechanics of Economic Development', Journal of Monetary Economics, Vol. 22, 1988, pp. 3-42) in which human capital accumulation is driven by government spending on public education. To balance the budget the government levies a tax on output in two alternative specifications of the human capital accumulation equation. The results consolidate some recent findings that taxation, when it is used for productive purposes, may lead to faster growth. Growth rates increase with taxes up to a level around 60-70 per cent.