Template-type: ReDIF-Paper 1.0
Author-Name: Gustavo A. Marrero 
Author-Name: Alfonso Novales
Author-Email: anovales@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/novales-cinca,-alfonso
Author-Person: pno7
Author-Workplace-Name: Departamento de Economía Cuantitativa. Universidad Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Title: Growth and Welfare: Distorting versus Non-Distorting Taxes
Abstract: Some concepts associated with the notion of public consumption could be considered 
	as wasteful public expenditures, so that a firstbest analysis would set their level 
	equal to zero every period. However, their ratio to output is significant and rather 
	stable over time in actual economies. In an endogenous growth framework similar to 
	Barro (1990), we analytically characterize the dependence of a second best public 
	investment policy on wasteful public consumption. We compare two extreme tax systems: a 
	distorting system and a nondistorting one. The presence of wasteful expenditures affect 
	optimal public investment and the optimal public financing mechanism. Since private agents 
	do not internalize the fact that by raising their capital accumulation they could be generating 
	extra public investment and consumption, financing public expenditures through lump-sum taxes 
	might lead to an excessive crowding-out impact on current consumption, which may sharply reduce 
	welfare in the short-run as well as limit public capital accumulation and long-run growth. It 
	turns out that this e?ect can be more damaging for growth and welfare than the disincentive created 
	on private capital accumulation when taxing capital income.
Classification-JEL: E0, E6, O4
Keywords: Endogenous growth, Distorting taxes, Public investment, Wasteful public expenditure
Length: pages 40
Creation-Date: 2003 
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae0302.txt
File-URL: https://eprints.ucm.es/id/eprint/7697/1/0302.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:0302