Fiscal policy and economic growth in the presence of intergenerational transfers
Date
2012-01-04
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Alternative Title(s)
Abstract
This thesis is entitled ’Fiscal policy and economic growth in the presence of
intergenerational transfers’. It is composed of four self-contained chapters and
focusses on the growth and welfare effects of taxation and public spending. The
common denominator of all four chapters is that they incorporate an endogenous
growth process in an overlapping generations model to evaluate long-term policy
implications when different generations are affected in different ways by fiscal
policy.
In the first and second chapter the implications of capital income taxation
for the growth process are discussed. The analysis emphasizes the role of public
and private intergenerational transfers in form of public pensions and bequests
as well as intergenerational redistribution induced by public policies. Among
other results, it turns out that the presence or absence of such transfers critically
determines whether an increase of capital income taxes with additional revenue
being devoted to cut wage taxes may enhance economic growth.
In the third chapter, the focus of the analysis is on social security funding and
its implications for economic growth. Whereas a pay-as-you-go pension scheme,
as considered in chapter one, naturally includes intergenerational transfers from
the current working generation to retirees, a fully funded social security system
does not. Still, the presence of such transfers within the economy in form of
private educational spending and bequests turns out to play a key role in deter-
mining the impact of funded social security on economic growth. More specif-
ically, it is shown that a funded pension scheme may harm growth if there are
operative bequests within the family, and parents thus face a trade-off between
educating their children and leaving bequests. By contrast, when bequests are
inoperative, the Ricardian equivalence holds and an increase in forced savings
is exactly offset by a reduction in private savings leaving capital accumulation
and educational spending unchanged.
Chapter four discusses the impact of fiscal decentralization on economic
growth in the context of education funding. While the traditional theoretical
literature on fiscal decentralization focusses mainly on efficiency issues, empirical
evidence for a positive relationship between fiscal decentralization and economic
growth turns out to be mixed. Some studies can confirm the positive impact
of higher degrees of decentralization on economic growth, whereas others face
difficulties in establishing a positive relationship and, in fact, obtain either no
dependency or a negative one. The aim of the fourth chapter is therefore to
further evaluate the theoretical linkage and, at the same time, to give an ex-
planation for the discrepancy between the empirical literature. The analysis
reveals that there exists a growth maximizing degree of fiscal decentralization.
Furthermore, it is shown that some degree of fiscal decentralization is always
superior (in terms of long-run growth and welfare) to a system where either
local or central governments exclusively finance educational investments.
Description
Table of contents
Keywords
Economic growth, Fiscal policy, Intergenerational transfers