Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/103094
Authors: 
Klenert, David
Mattauch, Linus
Edenhofer, Ottmar
Lessmann, Kai
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4972
Abstract: 
We study the trade-off between equity and growth in the context of tax-financed investment in public capital. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. In contrast to the results of studies that introduce heterogeneity through different initial endowments only, we find that under our heterogeneity assumptions an equity-efficiency trade-off does not necessarily occur. We show that a consumption tax or a capital tax, levied to finance public capital, does not increase inequality. In our model capital tax-financed public investment has even an inequality-reducing effect - thus allowing for Pareto-improving public investment that decreases inequality. Additionally we find that agents differ in their preferred tax rates. These results are valid for both, the case of endogenous growth and the case of steady state convergence and do not require the assumption of an identical rate of pure time preference across all households.
JEL: 
E21
E60
H23
H31
H54
Document Type: 
Working Paper

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