Distributive Policies and Economic Growth: An Optimal Taxation Approach (Q3148151)

The aim of the paper is to propose an infinite-horizon endogeneous growth model based on a CICIST (Capital Income Investment Subsidy Tax) scheme, to compare CICIST scheme to WT (Wealth Tax) scheme, and to investigate the following questions: (1) Are high capital income taxes always bad for growth? (2) Are optimal policies of the accumulated factor of production necessarily growth optimizing? (3) Does shifting political power to the non-accumulated factor of production cause higher taxes and lower growth? (4) Does capital income taxation really defeat the purpose of enhancing growth? CICIST scheme is modelled by using an important equivalence result according to which an equal tax rate on capital income and for investment subsidies is tantamount to a tax on consumption (of the capital owners). The paper identifies conditions under which the capitalists' preferred tax policies generate higher growth for the CICIST scheme than for the WT scheme. The author argues that high taxation of the accumulated factor of production may lead to high growth, the non-accumulated factor of production may act as growth maximizing, and capital income taxes are not necessarily bad instruments for investment subsidy financing. When comparing CICIST and WT tax schemes, it turns out that a right-wing government does not maximize growth under CICIST scheme, although it does so under the WT scheme, which it prefers. But capital owners policy under growth than their optimal policy under the WT. Then, the preferred policy of the accumulated factor of production is not always good for growth. Furthermore, it is shown that placing more weight on the welfare of the non-accumulated factor of production (i.e. workers) leads the government to raise the optimal tax rate the income factor of production (i.e. capital), and through this, the growth rate. Hence CICIST scheme is not optimal for high growth to shift all political power to the accumulated factor of production. The conclusion is that a switch in tax schemes may induce an important switch in optimal policies. Specifically, due to differences in tax arrangements, an economy with a government that represents only the interests of the non-accumulated factor of production (i.e. labor) can have higher growth than an economy represented by a government solely concerned about the accumulated factor of production (i.e. capital).