a1 University of Groningen, IHS-Vienna, Netspar and CESifo
a2 University of Groningen and Netspar
We study labor-income and consumption taxation in an overlapping-generations model featuring endogenous growth due to interfirm investment externalities. Consumption, saving, and labor supply display life-cycle features because mortality and labor productivity are 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.
We thank Karl Farmer, two referees, and various participants at the 2009 PGPPE Workshop in Graz for helpful comments and remarks.