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The Welfare of Investment Deductibility Under a Flat Tax
Author(s) -
Cugno Franco,
Zanola Roberto
Publication year - 2002
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/1097-3923.00108
Subject(s) - economics , consumption (sociology) , investment (military) , welfare , consumption tax , monetary economics , microeconomics , tax revenue , revenue , elasticity of substitution , endogenous growth theory , macroeconomics , public economics , production (economics) , indirect tax , tax reform , human capital , market economy , finance , social science , sociology , politics , political science , law
This paper analyses the welfare effects of investment deductibility in a contest of endogenous growth generated by learning–by–doing and knowledge spillovers. We present a model where a set of revenue neutral fiscal policies, each characterized by different degrees of investment deductibility and different uniform tax rates on income, have been introduced. We show that, given the ratio of public expenditures to national product, partial investment deductibility turns out to be welfare enhancing when the intertemporal elasticity of substitution of consumption is sufficiently small. Our result means that a pure consumption tax—although ensuring more saving and faster growth—is not always preferable to a revenue neutral tax system in which both consumption and investment are taxed.