Taxation, human capital and growth

This paper builds an overlapping generations model of endogenous growth by introducing human capital accumulation into the Blanchard overlapping generations model. In this model, the growth rate of consumption is increasing both in the after-tax interest rate and in the share of human wealth in total wealth. A higher rate of taxation reduces the after-tax interest rate, but at the same time it raises the share of human wealth in total wealth. If the horizon is short and the elasticity of factor substitution is high, the latter effect dominates the former and a higher rate of taxation increases long run growth. (C) 2002 Elsevier Science B.V. All rights reserved.