FEEM working papers "Note di lavoro" series
2001 .079

Consumption Taxation and Endogenous Growth in a Model with New Generations


Authors: Alberto Petrucci
Series: Economy and Society
Type: Journal
Keywords: Consumption tax,endogenous growth,overlapping generations
JEL n.: H24,O41
JEL: International Tax and Public Finance
Pages: 5
Date: 2002

Abstract

This article studies the implications of consumption taxation on capitalaccumulation in a one-sector endogenous growth model with finite horizons. A tax on consumption, when tax revenues are lump-sum rebated to consumers, redistributes income between living generations and future, still unborn, generations, and therefore depresses aggregate consumption and raises saving, stimulating capital accumulation and economic growth. If however the resources from taxation are used for financing unproductive public spending, the effect of the consumption tax on the endogenous growth rate disappears as no intergenerational redistribution of income occurs. Finally, a consumption tax hike accompanied by a compensatory reduction of public debt increases long-run economic growth and reduces the consumption-output ratio. Our results on consumption taxation differ substantially from those obtained within the endogenous growth literature.

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