Growth effects of consumption and labour income taxation in an overlapping-generations life-cycle model
We study labour-income and consumption taxation in an overlapping-generations model featuring endogenous growth due to inter-firm investment externalities. Consumption, saving, and labour supply display life-cycle features because mortality and labour productivityare age dependent and because annuity markets may be imperfect. The government’s method of revenue recycling critically affects the growth consequences of taxation.Purely consumptive government spending has a negative impact on growth. Redistribution of tax revenue from dissavers to savers may lead to an increase in growth due to beneficial intergenerational transfer effects.