Taxation, labor supply decisions and human capital accumulation : an application to kuwait economy

Abstract EN

Some recent studies on the economic effects of labor vs.

capital taxation in endogenous growth environments have reported quite different and often seemingly conflicting results.

Using a two-sector model of endogenous growth, this paper investigates the model's features and elasticity assumptions that are consistent with these results.

Controlling for all other parameters, it is found that differences in the representation of the labor supply decisions alone are sufficient for the reconciliation of these conflicting results.

Applying the framework to simulate the Kuwait economy over the period 1995-2050, the observation that a labor tax is generally associated with a higher welfare cost compared to a capital tax at an equivalent rate whereas the latter has a greater negative effect on economic growth.