Analysis of a two-sector model of endogenous growth with capital income taxation

This paper addresses a two-sector model of endogenous growth in which one sector produces final goods and the other produces new human capital. Both sectors employ human as well as physical capital under constant returns to scale technologies. Unlike existing studies of this type of model that have mostly concentrated on steady-state analysis or on numerical simulations of calibrated models, this paper presents an analytical argument concerning the dynamic behavior of the growth path and the effects of capital income taxation in and out of the steady-growth equilibrium. It is demonstrated that the dynamic behavior of the economy and some policy effects depend heavily upon the magnitude of factor intensity used in each production sector.