Schumpeterian Growth with Productive Public Spending and Distortionary Taxation
نویسنده
چکیده
The latest version of Schumpeterian growth theory eliminates the scale effect by positing a process of development of new product lines that fragments the aggregate market in submarkets whose size does not increase with population. A key feature of this process is the sterilization of the effect of the size of the aggregate market on firms’ incentives to invest in the growth of a given product line. In this paper I apply this insight to shed new light on the workings of fiscal policy. I analyze the role of distortionary taxes on consumption, household labor and assets income, corporate income, and public spending. The framework allows me to show which of these fiscal variables have permanent (steady-state) growth effects, and which ones have only transitory effects. It also allows me to solve the transitional dynamics analytically, and thus to analyze in detail the welfare effects of tax rates and public spending, and investigate the effects of revenue-neutral changes in tax structure. Pairwise comparisons reveal that replacing taxes that distort labor supply with taxes that distort saving/investment choices raises welfare. I discuss the intuition behind this surprising finding.
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