Labor and Profit Taxation, and the Supply of Public Capital

The paper analyzes the determinants of four fiscal trends, observed in many developed countries over the past 40 years: a decline in the corporate tax rate and public investment offset by an increase in the labour income tax and government consumption. Within a simple neoclassical growth model with a public sector, we illustrate the interdependency between the two government problems of how to spread the tax burden and how to allocate the spending. We identify alternative hypotheses that are consistent with the observed trends, and find that technological changes account for a substantial proportion of the changes in the fiscal instruments.