Growth, income distribution, and the ‘entrepreneurial state’

In this paper, we introduce a twofold role for the public sector in the Goodwin (1967) model of the growth cycle. The government collects income taxes in orderto: (a) invest in infrastructure capital, which directly affects the production possibilities of the economy; (b) finance publicly-funded research and development (R&D),which augments the growth rate of labor productivity. We study two versions of the model, with and without induced technical change; that is, with or without a feed-back from the labor share to labor productivity growth. In both cases we show that: (i) provided that the output-elasticity of infrastructure is greater than the elasticityof labor productivity growth to public R&D, there exists a tax rate that maximizesthe long-run labor share, and it is smaller than the growth-maximizing tax rate; (ii) the long-run share of labor is always increasing in the share of public spendingin infrastructure; (iii) different taxation schemes can affect the stability of growth cycles.