The Steady-State Effects of Income Taxation with Endogenous Time Preference

Abstract

This article studies the steady-state effects of income taxation on output by incorporating endogenous time preference into the neoclassical growth framework. It is found that a rise in the income tax may lead to a boom in economic activities in the long run. This result contrasts with a general conclusion of neoclassical growth models that a surcharge in the income tax will depress output. Furthermore, the scenario that the government transforms the tax revenues into the productive government expenditure is discussed. The authors find that the effect of public infrastructure expenditure on the marginal productivity of private capital may reinforce or diminish the results in the endogenous time preference case.