Growth effects of income and consumption taxes

Gian Maria Milesi-Ferretti

Nouriel Roubini

Journal of Money, Credit and Banking 30 (1998) 721-744

The effects of income and consumption taxation are examined in the context of models in which the growth process is driven by the accumulation of human and physical capital. The different channels through which these taxes affect economic growth are discussed. It is shown that the effects of taxation on growth depend crucially on whether the sector producing human capital is a market sector, on the technology for human capital accumulation, and on the specification of the leisure activity. In general, the taxation of factor incomes (human and physical capital) is growth reducing, while the effects of a consumption tax depend on the specification of leisure. The paper also derives implications for the growth-maximising choice of tax instruments.