Taxation and growth with overlapping generations

Abstract

This paper examines the growth effects of wage and interest income taxation in an endogenous growth model, which is characterized by diminishing point-in-time returns in human-capital producing technology and overlapping generations of two-period-lived individuals. We show that the greater the long-term learning time of individuals the more individuals inherit human capital from the previous generation. We demonstrate that a flat-rate wage tax stimulates economic growth, while interest income taxation does not necessarily foster such growth. Intergenerational redistribution induces individuals to change both physical and human capital accumulation, affecting the growth rate through changes in factor prices.