Tax Incidence in Dynamic Economies with Externalities and Endogenous Labor Supply

This paper examines the long-run incidence of factor income taxes and expenditure taxes in an infinitely lived representative agent growth model which allows both for production externalities and for endoge-nous labor supply. The novelty of this paper is its investigating of how the long-run incidence of taxes is affected by indeterminacy of equi-libria that is caused mainly by nonseparable preferences between con-sumption and leisure. We show that the effects of the taxes on steady state welfare as well as the steady state levels of consumption, capital, and employment are all negative regardless of whether a steady state is determinate or indeterminate in an exogenous growth model. By contrast, in an endogenous growth model those distortionary taxes are growth and welfare enhancing in both a determinate steady state featuring the unconventional slope of the labor supply curve and an indeterminate steady state featuring its conventional slope