INCOME TAXATION AND GROWTH IN AN OLG ECONOMY: DOES AGGREGATE UNCERTAINTY PLAY ANY ROLE?

We analyze the effects of capital income taxation on long-run growth in a stochastic, two-period overlapping generations economy with an aggregate AK technology. We distinguish between capital income and labor income, and between attitudes towards risk and intertemporal substitution of consumption. We show necessary and sufficient conditions such that i) increments in the capital income taxation lead to higher equilibrium growth rates, and ii) the effect of changes in the capital income tax rate on the equilibrium growth may be of opposite signs in stochastic and in deterministic economies. Numerical simulations show that deterministic OLG economies are a good approximation of the assessment of the effect of taxes on the equilibrium growth rate in stochastic economies as in Smith (1996).