Income taxes and endogenous fluctuations: a generalization

Abstract

This paper offers an integrated framework of one- and two-sector optimal .growth models for the dynamic analysis of the joint effects of distorting taxes and production externalities. We investigate how capital and labor income tax rates influence local dynamics near a steady state depending on the sizes of externalities. Our results clarify how tax rates on factor income affect the range of the sizes of externalities that induce indeterminacy. We find that the possibility of indeterminacy is significantly higher for given values of externalities, the labor supply elasticity and the elasticity of intertemporal substitution in consumption if capital income tax rates are increased from zero to values similar to those in many countries.